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Saving the Flood Insurance Program

Coastal homeowners want more protection, but U.S. taxpayers would foot much of the bill.

Congress' flood-insurance debate could have big ramifications for homeowners' insurance bills, and it's putting coastal residents at odds with an assortment of groups opposed to adding wind-damage coverage.

Lawmakers are wrangling over reforms for a federal program that is badly in debt and badly needed by the 47 million people living in Hurricane Alley. President Bush must sign into law a new or modified version of the National Flood Insurance Program, by Sept. 30, the date at which it's set to expire.

One major stumbling block to passing the bill through Congress has been whether to add wind policies to the program, which now covers only flood damage. The topic is scheduled for another congressional debate as early as Tuesday, and many people following the debate expect a decision to be made before the Memorial Day recess.

The legislation that passes will likely extend the program for at least five years, shore up losses with higher premiums and phase out subsidies for commercial property, vacation homes and other nonprimary residences. It might also raise coverage limits and, perhaps most importantly, add coverage for wind damage.

The wind issue has pitted coastal residents against a wide array of groups -- including, but not limited to, the insurance and reinsurance industries, mortgage lenders, realtors, environmentalists, inland residents and laissez-faire capitalists. Coastal dwellers want the most protection at the lowest cost, while the other groups take issue with various parts of the potential law.

Coastal vs. Inland

Homeowners' insurance premiums have skyrocketed in areas like the Gulf Coast and Florida ever since the 2005 hurricane season. Louisiana residents, on average, faced an 11.7% rate hike in 2006, followed by a 3.6% rise in 2007, according to the state's Department of Insurance. Those increases were felt especially in coastal areas.

Without some type of reform, property owners may start dropping or reducing insurance coverage. More uninsured residents could force higher government payouts when disaster strikes.

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However, a Government Accountability Office report found that adding wind coverage would pose significant challenges, including the potential for large deficits.

Many argue that all taxpayers shouldn't foot the bill for risks that only part of the population takes on to live, work, play and further develop near the shore.

"It's a good deal if you need flood insurance and wind insurance," says Steve Ellis, vice president of Taxpayers for Common Sense, a nonpartisan watchdog group. "But if you're anybody else, it's a sucker bet."

Bob Hartwig, president of the Insurance Information Institute, points out that even in the most extreme circumstances, many homeowners won't pay for protection. Though there was a spike in flood-insurance purchases from the NFIP after the 2005 hurricanes, many of those customers did not renew.

"When people are given the option to buy the coverage, even to protect their most valuable asset, most people will not elect to do that," Hartwig says. "They simply won't."

Insurers' Point of View

Today, most homeowner policies do come with wind protection. If the government displaces that system, it will be impossible to spread risk and prices in a reasonable way or have a profitable business, according to Justin Roth, director of federal affairs at the National Association of Mutual Insurance Companies.

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"In some areas it's more expensive than others, and rightfully so," says Roth. "It makes sense that someone who lives in a mansion in Miami in South Beach would pay more than someone living in Iowa."

Yet many coastal residents are hit hard by the premium levels. Louisiana and Mississippi are among the priciest U.S. markets for homeowners insurance, but are among the states with the lowest median income.

Wind Protection Outside the NFIP

States have also tried to make insurance more affordable by subsidizing it, through entities like Florida's Citizens Property Insurance Corp. But Citizens has become a fiscal nightmare because it doesn't price policies according to risk, or reserve adequate funds to cover damages.

"Predictably, it went broke in both 2004 and 2005," says Hartwig. "The Louisiana and Mississippi programs both also went broke in 2005 after Hurricane Katrina. Every last one of them has gone bankrupt over the last 20 years, at least once."

Connecticut Sen. Chris Dodd offered another proposal to provide $200 million a year in federal loans for storm-proofing homes and businesses. He also proposed a one-time tax credit for coastal residents who face skyrocketing premiums.

Insurers are behind Sen. Dodd's legislation because it doesn't sap their business and incentivizes people to protect the assets they cover. Others support the bills because they would help coastal residents without putting a large financial burden on all taxpayers.

Still, those on the coast say it's not enough.

"We need to ensure that homeowners are offered a full spectrum of insurance products to protect themselves and their investments," says Mississippi Sen. David Vitter.

The Bottom Line

Where you stand depends on where you call home -- or time share.

Those living on the flood plain will almost certainly be better protected at a relatively low cost, even if the NFIP's below-market premiums rise. Extending protection to renters, business owners and vacationers or adding wind coverage would sweeten the deal further.

And, of course, taxpayers will be footing at least some of the bill.

The Congressional Budget Office estimates that changes to NFIP's flood coverage alone will cost about $6 billion from 2008 to 2012. That doesn't include $1.6 billion for flood mapping and other items. Costs could be far greater if there's another devastating hurricane season like 2005.

If the NFIP were to include wind coverage, there is a "reasonable potential" its deficit would reach $100 billion to $200 billion per year, according to a Towers Perrin study funded by the American Insurance Association.

If the program covered only 20% of the market, focusing on the most wind-prone areas, the annual deficit would be a smaller but still significant $20 billion to $50 billion.