Receding waters met by rising questions

Published 12:00 am Sunday, May 29, 2011

OXFORD — The basic mechanism of the commercial insurance industry is “shared risk.” For cars or homes or health, a little money is collected from a lot of people and pooled. Then, when a policy owner who has contributed to the pool has a wreck or a fire or needs surgery, money from the pool covers the cost.

Another basic process, equally important to the profitability of insurance companies — and no one would sell insurance if it were not profitable — is called underwriting.

Underwriters are the bookies of the insurance world. They determine the odds. They cipher the costs and calculate the company’s exposure. In simplest terms, insurance for a new car costs more because a new car is more expensive to repair if wrecked or replace if stolen. Likewise, a brick house costs less to insure than a wooden house because the brick house is less likely to burn.

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If the underwriters get it right, insurance companies can stay in business. If underwriters get it wrong — and not enough money goes in the pool — insurance companies go belly-up.

At this point it would be easy to launch into a rant about insurance companies being too duplicitous and gouging us. But this isn’t about private insurance. It’s about something else: Over the past couple of decades, governments — particularly the federal government — have become the all-risk insurance company for citizens.

That would be great, except that government has accepted this expositure without any semblance of honest underwriting.

There’s no finger of blame being pointed here. It’s just the way it is. Our grandparents did not expect bailouts or compassion from government. We do.

After earthquakes and mudslides in California and wildfires in Western states in the 1990s, governments provided incrementally more and more cash relief directly to citizens.

After the terror attacks of Sept. 11, 2001, Congress created a fund to provide at least $1 million each to families who lost loved ones on that horrible day.

After Katrina hit Mississippi in 2005 and flooded New Orleans, aid packages of more than $5 billion for Mississippi and $10 billion for Louisiana were approved.

Now that the Mississippi River is receding from this year’s record flooding, “Who will pay?” is the question of the day.

One program at center stage again is the National Flood Insurance Program. It is a hybrid of private coverage and public aid, created before full-fledged aid entitlements.

People who own structures in areas identified as flood-prone are able to buy NFIP policies from commercial agents. Money to pay claims greatly exceeds the program’s income, so public funds make up the difference.

A catch is that to head off repetitive claims, the NFIP will pay claims greater than half the preflood value of a structure only once. After that, the structures, if anything’s left, are to be raised above flood levels or destroyed. Local governments are not allowed to issue utility or construction permits for any work below flood levels.

NFIP is going to be hit hard in coming days. Too few understand the program or how it works. (Imagine handing a flood victim a check for repairs and explaining that it can’t, in some cases, be used for repairs.)

Also, remember that NFIP wrinkle — that eligibility is based on a structure being in a known flood zone? On the Gulf Coast after Katrina and along the Mississippi this year, there are homes that weren’t eligible for flood insurance but were damaged by water.

After Katrina, Gov. Haley Barbour led an effort to provide coastal homeowners $150,000 grants on the theory that the government failed to warn them and that if they’d known their residences could flood, they would had purchased the coverage. Will the same occur for those outside the flood zone who experienced flooding this year?

Again, it is not necessarily a bad thing for government to backstop citizens, to compensate us the same way an insurance policy would shore us up financially after a traumatic loss.

And, of course, shared risk is the theory underlying all nationalized health insurance plans.

What is bad — and unsustainable — is for government to make express or implied promises to pay for our personal losses without “underwriting,” without making sure there’s enough money going into the pool to pay claims.

This is where state and federal governments have failed the people. The fallacy ripe in society is that government can fix everything at no cost to anyone. Pointing that out is not reactionary. It’s realism.

Charlie Mitchell is a Mississippi journalist. Write to him at Box 1, University, MS 38677, or e-mail