Traderelic

Archive for September, 2011

Although the rain fell and floods came with Hurricane Irene, it was not quite on a Biblical scale, but it was certainly devastating to many communities that had never before believed it possible they could be the victims of flooding. Yet, in upstate New York and Vermont, entire communities have been introduced to a new reality of flooding and mudslides. No matter what you think about all these stories of global warming and climate change, there’s an underling reality you can’t deny. This has been a bad year for weather. Read any of the hard news sites and they will all tell you the same story. Property and auto insurance claims have already broken records this year. By the time we’re through December, the year 2011 will have gone into the books as the most expensive for weather-related insurance claims.

Perhaps not surprisingly, insurers have been receiving a lot more calls asking about flood insurance. Obviously, many homeowners have discovered their own policies exclude flood damage. In the hope of reducing future losses, they now ask what’s available and this is not good news. The majority of private insurers withdrew from covering floods some years ago. For a number of reasons, insurers have found they cannot make flood insurance profitable and they are not prepared to cross-subsidize from other types of cover. Most now only offer the Federal Flood Insurance Program which is funded out of tax revenues. As an aside, even this insurance may be lost if Washington fails to renew its funding allocation by the end of September 2011.

Assuming the Federal Program survives this budgetary crisis, it’s not really designed for the majority of homes. The first states that asked for federal help were on the Gulf Coast and the majority of properties built close to the sea don’t have basements. The cover for basements is therefore limited to the replacement of mechanical equipment like furnaces and water heaters, and the main cover only applies to the first story and above with a maximum of $250,000 for rebuilding. If you live further north, basements are common and rebuilding costs are higher. This suggests you will always need to top up the Federal Program cover. You will always need a basic home insurance policy to cover all the other ways in which your property can be damaged. The Federal Program limits contents claims to $100,000, so you will need a policy to increase the rebuilding and contents limits. The cost of this supplemental covers varies quite significantly depending on the weather patterns and geography of your state. It might surprise you to know there have been quite serious floods in Arizona, but they are quite rare. Where the risk of flooding is low, you can probably find additional cover for as little as $300 a year. In states where the risks are higher, the home insurance rates are likely to be between $600 and $800 a year. After a while, you will come to a hard decision. In states where the risk of flooding is actually quite small, how long will you pay the additional premium? According to the insurance industry, most people allow these supplemental policies to lapse within two to four years.

To understand the issues, let’s start with a quick tour of ZIP codes. They are used by the US Postal Service to sort the mail faster. Once sorted, bundles of mail are delivered by staff who know the ground. This plan was not devised to help set insurance rates. Indeed, when you look at the boundaries on a map, you see how arbitrary they are, often lumping completely different groups of people together regardless of social class or property value. Basing the calculation of premium rates can therefore look unfair in urban areas where, on one street all vehicles can be parked off the road in locked garages overnight whereas, round the corner, the quality of the neighborhood just changed for the worse and crime affecting vehicles parked on the roads is rampant. Imagine how people who have lived on that second street feel. They have been paying their premiums for years and now must suddenly pay more because they have no choice but to stay – sadly, with the collapse of the housing market, it’s no longer easy to sell and move to a “better” area. In other words, basing the premium rate on the address rather than the safety record of the driver looks unfair.

Let’s now move over to Milwaukee where State Senator Tim Carpenter has introduced State Bill 289 to prohibit insurers from relying on ZIP codes to set premium rates. This is yet another attempt to repeat the success in California where, in 2008, John Garamendi, the Commissioner for Insurance, finally pushed through the regulations to reduce the insurers’ reliance on ZIP codes. Note the regulations do not outlaw the practice. The Californian insurers can still use the ZIP codes as one of the factors when setting the rates. But the codes can no longer be one of the “main” factors. Why not outlaw it altogether?

The answer depends on the difference between the insurance policies. Liability cover pays out to any third parties we may injure through our bad driving. This can be and, for the most part, is based on our individual safety record as drivers. Where we live is never going to be terribly relevant to where we drive once the vehicle is in motion. The problem comes with collision and comprehensive cover. Both types pay out to you if your vehicle is damaged in a collision, by a vandal or by a tornado. Where you park your vehicle must therefore be an important factor in deciding the risk you might get hit. Similarly, the local crime rate when it comes to vandalism is as relevant as whether you live in an area frequently hit by tornadoes, floods, landslides, etc.

So, comparing these different policies, you might find cheap car insurance if all you want is the minimum liability cover. Where you live is always going to be less important. But when you move on to collision or comprehensive cover, where you live become far more important. For this reason, Tim Carpenter’s bill is going to struggle in Wisconsin. Although the insurers there are exaggerating when they say this bill will mark the end of cheap car insurance, only a compromise between the state and the insurers will produce a fair outcome.

Like everything written down, the Affordable Care Act sounds the perfect answer to all our problems. Except, of course, when it comes to turning the words into action, problems can emerge. One of the battlegrounds is turning out to be the insurance marketplaces or exchanges. These are supposed to make it easier and cheaper to buy insurance. They should allow people to compare prices, and discover whether they are entitled to any assistance like tax credits, Medicaid or the Children’s Health Insurance Program (CHIP). Every state is supposed to have one up and running by 2014. Should any state default, the federal government is apparently ready to step in and run one. The principle matches the mandate. If everyone is required to buy a policy, buying a policy should be made as easy as possible.

As we come in the Fall, ten states have already passed the necessary enabling legislation and are on their way toward getting their exchanges in place. Seven more states have bills pending. Legislation has failed in sixteen states. The rest of the states have either decided to take their time or are flatly refusing to make progress. Such is the world of politics with the Republican party dead-set against exchanges. Some GOP governors have sworn oaths on a stack of Bibles they will never sign an enabling bill into law. Yet this is not necessarily good politics.

Because the federal government will impose an exchange if the state refuses to act, the arrival of an exchange is unavoidable. Some GOP governors are therefore interested in negotiating terms. If they have no choice, they might as well try to influence the outcome to their advantage. So this September, health officials from the majority of the states will be attending a conference organized by the Department of Health and Human Services. Most GOP governors are prepared to talk about a partnership approach to give them some political leverage. Equally, if the states actually do less of the work, the budget requirements will be lower. For example, some states are offering to run local call centers to guide people through their choices. This is fairly uncontroversial. More problematic are the offers of some states to run outreach and education programs to bring their citizens into the exchanges. If staff hostile to the notion of the exchanges are involved, the exchanges may not get the expected number of applicants.

When the dust settles at the end of all the negotiations, we can hope for a health insurance exchange or marketplace in every state where citizens can be guided between federal and state aid, and the private section plans. With supportive staff working in the call centers, everyone should end up with the level of cover appropriate to their individual needs. Significantly, the exchanges are also intended to help small and medium-sized businesses navigate the new laws. Many business people are as confused as ordinary citizens. If everything works as it should, we should all find access to affordable covered significantly easier. However, with their opposition to the central principles of Obamacare undiminished, we can expect the GOP to find a whole new set of ways to slow down this health insurance reform. Your vote in the next election will help decide matters.