By The Tall Angry Scotsman
In times like these, we naturally focus on the loss of life and potential human costs of a storm like Harvey. People are showing heroic bravery and untold compassion in the face of this disaster, and bravo to people being their best selves.
When the rain stops and the water recedes, there will also be a financial burden. Those counting themselves lucky to be alive will be faced with some devastating losses of property in their homes. How will the region recover and who ultimately shoulders this burden?
The answer isn't quite as clear as it seems and depends heavily on what causes the damage. There are two major perils in a hurricane or storm: wind and water. Let us deal with the easier of the two first even if it isn't the biggest threat for Harvey - wind.
Wind damage is covered by the typical home insurance policy. You pay yearly premiums and if a storm rips your roof off, the home insurance company pays for it. This also applies to damage that wind started but may not have been the real problem. Wind may blow a tree down, which isn't a huge deal unless it smashes into your house. Home insurance covers that. Or if a window gets blown out by wind, not only is the window repair or replacement covered, so is all the damage that happens when rain comes pouring through the hole where the window used to be.
Putting aside the fact that "rain" is water for a second, let's look at how home insurance companies pay for their share. Clearly they collect the premiums mentioned above, but what happens when that's not enough? Two things come into play. First, every year that the company takes in more than it pays out, that extra money is invested and earns interest. That interest is reinvested and earns more interest, and so on. Second, the home insurance company buys reinsurance. In cases of catastrophic disasters, they agree to pay a certain amount and anything over that is paid by the reinsurance company (who the home company pays premiums every year, the extra money is invested, etc..) That reinsurance cost is passed on to the person buying the policy in the form of higher premiums.
Now for the flooding. If that rain collects on the ground and gathers with enough pond, stream, river, or ocean water that it comes into your house, home insurance is out because they specifically say in their policies they don't cover that. So people buy flood insurance from either the government (through the National Flood Insurance Program or NFIP) or a private carrier.
Unlike home insurance companies, which put up their own money and buys reinsurance as needed, most "private" flood insurance is actually government backed flood insurance (through the NFIP) with the private company's name on it. That company "administers" the program, meaning they rate and sell it through their agents using NFIP rules, and taking a cut in the process. Why not just cut them out? Ask your Congress person how much their campaign received from insurance companies and agents.
None of this would matter except for years the NFIP set their rates too low and had no way of making people buy their product. There is no extra to invest and make money to then invest and so on. More recently rates have come up, fees have been raised and federally secured mortgages now require flood insurance for homes in low elevations and coastal areas, but the program is still billions of dollars in debt. In debt to whom? The American taxpayers by way of a Treasury Department that just ships over a fresh stack of dollars when the NFIP needs it.
It is important to note home and flood policyholders also have deductibles, so many will be responsible for the first $500, $1000 or more of their losses. Others will not have insurance at all and will lose whatever was damaged. But to sum things up: if you are a homeowner that pays for homeowner's insurance and pays federal taxes, much more of the Harvey losses will fall down to you and your wallet in one way or another.