Actuarially based flood insurance rates scheduled to be phased in starting next year are unaffordable to Louisiana’s coastal residents, and could have a devastating impact on the state’s economy, the state’s insurance commissioner says.
Jim Donelon made his comments to the National Underwriter as he prepared for a critical meeting Thursday with Federal Emergency Management Agency Associate Administrator David Miller, who oversees the National Flood Insurance Program.
Miller is also scheduled to meet Friday with officials in Mississippi because of the impact of the rate increases on that state’s coastal areas.
In his comments to the National Underwriter this week and in appearances in Baton Rouge and Washington last week Donelon said the rate increases are so big they could hurt the state's economy.
The rate increases are scheduled to be phased in starting in 2014.
“The increases will have a devastating impact effective immediately,” Donelon said.
“Homeowners have to have flood insurance to protect their investment, even if they have no mortgage,” Donelon said.
“These rate increases will render thousands of properties worthless because insurance rates will be going up so dramatically and suddenly,” he said.
It would do so by making it almost impossible for owners to sell thousands of properties outside the New Orleans region's federal levee system because the entire rate increase would go into effect immediately if a property is sold, Donelon said.
Billy Ward, president of the Louisiana Home Builders Association, has told local publications that some property owners could see rate increases of 4,000%.
Donelon was in Washington last week to answer questions posed by the Government Accountability Office. The GAO is mandated by the 2012 law that changed the NFIP rate structure to conduct a study as to the feasibility of privatizing the program.
Donelon said he told the GAO that the “the NFIP is more important for Louisiana than any other state.”
But, he said, by rendering thousands of coastal properties worthless because, overnight, their owners will not able to afford flood insurance coverage, he believes the program should be scrapped.
Next Page: 'More Appropriate Alternative"
A more acceptable alternative may be for the government to create a catastrophe, flood and earthquake reinsurance program as a backup to the current homeowners’ insurance program.
Congress, however, has repeatedly rejected such proposals. For example, legislation creating such a program, the Homeowners Defense Act, was introduced every year for four years by a Palm Beach, Fla., Democrat defeated in the 2010 election.
Sen. Bill Nelson, D-Fla., recently reintroduced such legislation. Conservative economists have dubbed it the “Beach House Bailout” law.
But Donelon defended such an approach. “It would provide a backstop for traditional coverage as existed decades ago, before creation of the NFIP, and allow an expansion of homeowners’ and commercial insurance,” Donelon said.
“That is what should be done long-term,’ Donelon said. “But I am open to other suggestion as well because this is definitely a threat to our state’s economy.”
Donelon said that primary residences and commercial property along Louisiana’s “working coast” are the primary areas of concern.
“We have little second homes, very little beachfront properties,” Donelon said. The properties impacted by this are the primary residences of our ‘working coast,’ those of fisherman, oilfield workers, onshore and offshore, dock workers, etc., and their commercial businesses,” Donelon said. He said these included grocery stores, fire stations, schools, and the teachers and police who serve the coastal areas.
Sen. Mary Landrieu (D-La.) has introduced legislation that would delay the onset of the new rates for some properties for one year.
Legislation containing such a provision has been reported out by the Senate Appropriations Committee. However, given the gridlock in Congress, it is unlikely to be enacted. Moreover, critical members of both the House and Senate have indicated that they would oppose any changes in the law, the Biggert-Waters Act.
However, FEMA is seen as being given some flexibility to delay the onset of the rates by either legislation or by regulatory action by the Obama administration.
That is why the Miller trip to the state is seen by Louisiana and Mississippi as crucial.
As Landrieu stated in announcing that Miller would visit Thursday, Landrieu said, “Miller’s trip is critical for FEMA to understand how these rate increases could dramatically burden homeowners and small business owners in Louisiana and throughout the country.”
She added, “We must find a long-term solution to making flood insurance affordable, accessible and self-sustaining.”