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More important for flood insurance to be ‘actuarily sound’ than affordable: APCIA panel

APCIA conference climate panel.jpg
Craig Fugate and Douglas Holtz-Eakin

Charging adequate premiums is a fundamental tool to ensure resiliency amid rising climate concerns, according to a panel of experts speaking on mitigation and resiliency in the climate change debate.

Former FEMA administrator Craig Fugate said: “Pricing risks, what people can afford, will change behavior. Providing the false economy of subsidized rates just makes it worse, and, ultimately, it is the taxpayer [who’s going to] pick up the bill.”

Fugate was speaking on a panel at the APCIA Annual Meeting in Denver, Colorado on Monday.

He was referring to how the government-run National Flood Insurance Program had historically undercharged for rates, running at a huge deficit.

Douglas Holtz-Eakin, president at the American Action Forum, said: “I’ve been concerned about the fact the overall pressure to keep rates down and not discriminate among risks ends up sending people to the court of appeals, which is always the Congress and ends up on the taxpayer’s dime.”

He went on to add that “we are assuming these are systemic risks because the government is always socializing them, but they don’t have to be socialized”.

“They can be dealt with by the private sector, if we let them,” he noted. “That thinking has got a little bit fuzzy.”

Fugate highlighted an ongoing debate on whether flood insurance should be “actuarily sound” or if rates should be kept lower amid a shortage of affordable housing.

“That’s the dual nature of flood insurance,” he pointed out. “Should flood insurance be actuarily sound, or should it be affordable? My answer is, we should go full speed actuarily sound.

“Here’s what you hear all the time: if you raise building code standards, you’ll make homes unaffordable. I haven’t seen an affordable home on the Florida coastal communities since I was six. Who are we kidding here?”

In reference to building in Florida, a high-risk area for natural catastrophes, Fugate explained: “There’s no reason why you cannot build property in Florida. As long as you’re not on the dune line, step back a little, you’ll still have a beach view, you just won’t be on the surf.

“This is where we don't have the leadership on either side to really articulate that the climate is already changed. You debate all you want to, you can't explain record-setting weather events.”

Both panelists agreed that the best way to ensure communities living in high-risk areas are adequately insured is through appropriate pricing models.

“Pricing models change behavior faster than just about any other social experiment,” Fugate stated.

He gave the anecdotal example of his sister, who gave up smoking – not because she didn’t like cigarettes but because she could no longer afford the cost.

“People have to understand capitalism can be good and evil, just like any other tool,” Fugate said.

“If you want to really affect fast, rapid adaptation, price the risk for what the market says it is, not what people think it should be.”

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