Shelby’s Capital Idea

New Orleanians use the storm and Katrina not only to indicate the primary meteorological incident, a hurricane; the terms additionally encompass the levee breaches, the ensuing flood, the resulting deaths, the rescue efforts, the governmental blunders, our extended—sometimes permanent—stays in the diaspora, the near-death of our city, Hurricane Rita, which arrived three weeks after Katrina, and in many cases every day that has passed since August 29, 2005.

Sara Roahen, Gumbo Tales

On April 1st I was running late for a hearing on flood insurance reform. There was only one witness; Craig Fugate missed an earlier hearing to monitor the tsunami that had so recently overwhelmed Japan. This was a make-up hearing taking place on a beautiful Friday morning and there were plenty of empty seats up on the dais and in the audience. I took a seat near a friend.

FEMA Administrator Fugate is a man who inspires confidence, at least in me. He was forthright, matter-of-fact, and didn’t hesitate to answer questions directly. My favorite moment in the hearing was Fugate’s takedown of his fellow Floridians who have set up federal taxpayers to take the fall for their oversubscribed, underfunded state property insurance program. At least someone in the federal government gets the joke.

My friend and I hung around after the hearing, talking about the flood program. She said I seem to take the issue personally. It is personal and it should be for you, too.

Here’s why.


I believe it was the morning of August 30, 2005, that an official from Louisiana Citizens, the state run insurer of last resort, called the office asking for a $500 million emergency federal appropriation so Citizens could pay claims. In less than 24 hours the state run insurance program was insolvent. It was Tuesday; Citizens needed the money that week. They knew it wasn’t going to happen.

Soon afterwards, Louisiana homeowners discovered they were liable for every penny of the little more than $1billion in claims that Louisiana Citizens couldn’t pay out. To cover what was one of Louisiana’s largest bond issuances, every homeowners policy in the state was assessed an ongoing Katrina surcharge.

Armed revolt almost ensued. Almost. The legislature ultimately opted to spread the costs to all Louisiana taxpayers by allowing a state income tax rebate equal to the Katrina surcharge. According to the State Treasurer, the average rebate for the Katrina surcharge this past year was $136.59. And so the little known fact remains—Louisiana covered all losses in the Louisiana Citizens program.


How long did it take officials at the National Flood Insurance Program to have their Louisiana Citizens moment? When did they realize how hopelessly unprepared the program was to meet its obligations? It took them a couple of times to get the number right, but ultimately the NFIP had to ask Congress for permission to borrow around $20 billion from the Treasury.

Sara Roahen captures in one sentence the essence of Katrina; for the people who lived it, Katrina divides time. Katrina is how things were versus how things are. Bankrupted and currently $17 billion in debt, the NFIP is viewed by Congress in very simple and familiar terms from the Louisiana lexicon: pre-Katrina and post-Katrina.

The House Financial Services Committee is marking up yet another post-Katrina NFIP reform bill this week. The bill increases premiums, eliminates subsidies, improves flood insurance rate maps, and allows the NFIP to purchase private reinsurance. On the other hand, the bill delays the effective date of new flood maps for up to 5 years, gives local officials even more ways to suspend mandatory flood insurance purchase requirements for high risk areas, and expands NFIP coverage lines. The bill does all of this and more, but it doesn’t directly address the NFIP’s $17 billion post-Katrina debt problem.

Everyone knows the NFIP will never repay this debt. During the hearing Administrator Fugate said it was “unlikely.” So, what’s to be done?

Personally, I think the Louisiana Citizens model makes sense. If you benefit from the NFIP, you should pay its freight. If Louisiana can do it, I know the nation can, too. However, there is that risk of armed rebellion to contend with.

If we don’t want the people who use the NFIP to pay its debts, perhaps we should acknowledge that the American people are already paying for the debt and move it on the balance sheet. We don’t have to like it, but we can’t deny the post-Katrina reality—we own the NFIP’s debt. It is personal after all, isn’t it?

If we decide to pay the bill we need to make sure we only pay it once. The NFIP needs to act more like an insurance company rather than a government program in one very important way. The NFIP needs a minimum capital standard; it needs to have reserves the same way every other property and casualty insurance company in the country does. State regulators would never allow an insurance company with $1.2 trillion insurance in force to stay in business without any capital. Only the federal government (and Florida) does this.

The NFIP was never capitalized and so the program was never actuarially sound from its founding. In 2006, Senator Richard Shelby attempted to correct this problem by proposing that the NFIP maintain reserves equal to 1 percent of all risk exposure in force or effect in the program while eliminating most program subsidies. In exchange, the NFIP’s then $20 billion debt was to be taken on by taxpayers.

We look at the NFIP in post-Katrina terms, but the reality is today’s NFIP is still very much a pre-Katrina government program. A Shelby-style capital requirement is an important component of a realistic, long-term solution to maintaining the NFIP’s solvency and protecting taxpayers from future NFIP losses. Congress needs to eliminate subsidies and allow the NFIP to purchase reinsurance to cover catastrophic coverage, but nothing beats cash money in the bank.

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