Letter From Washington: I Like COASTAL (But Not Ketchup On A Hot Dog)

by Eli Lehrer on June 7, 2011

photo by moose477/Flickr, used under a Creative Commons license

Sen. Roger Wicker introduced his COASTAL Act last week and I commented on it. Bottom line: I like it.

Here are the details: Heartland Advisory Board member Scott Richardson rolled out the idea at a conference that I helped coordinate a few years ago and I’m delighted to see it finally put into legislative language. For those unfamiliar with it, the bill whose name stands for the only-in-Washington “backronym” –Consumer Option for an Alternative System To Allocate Losses Act of 2011—would create a “standardized loss allocation” (SLA) system to distribute losses between a homeowners’ insurance policy and the National Flood Insurance Program in cases where hurricanes reduced homes to a slab. (Since nothing is left, claims adjusters have almost nothing to go on.) Under the law, a model developed by the National Oceanic at Atmospheric Administration would determine how much private insurers would pay and how much NFIP would pay for each home. Litigation would be more-or-less eliminated and claims could be paid more quickly. Companies would know, from day one, what they would have to pay and would have little uncertainty. Consumers could always opt out as could companies that don’t take part in the Write Your Own that has private companies service and administer policies that NFIP underwrites. (Companies that write homeowners’ insurance and do NFIP Direct through agents they employ directly—a class that, best as I know, consists of only one company—would also have to participate.)

Like any sweeping concept, of course, the idea is going to have detractors. So far, I’ve heard three major concerns: one is based on faulty information, one is true but isn’t a public policy problem, and one is, yes, legitimate.

The wrong information first: some companies seem to think that they will be forced to participate in the SLA program. As I read the bill, this simply isn’t true: it sets up the system and says that non-WYOs “may” (not “shall”) participate in the program. If it’s still unclear, Wicker’s staff has told me that he’s willing to introduce an amendment in markup to make this crystal clear.  Companies shouldn’t be afraid that they will be forced to take part and saying that the program is a new mandate simply isn’t true.

The real but non-problematic concern is second: since the program is mandatory for WYOs, its reasonable to believe that some WYOs somewhere will drop out because of it. And some don’t like this in part because WYO is a profit center for some companies—they get paid (albeit modestly) for servicing the policies but take on no risk on them. It may also inconvenience some customers and agents who will have to do more paperwork, go through a more cumbersome claims process in some cases. My thought: so what? As long as the model isn’t horrible, some slight inconveniences for a few people and reduced profits for a few companies will be well outweighed by the solution to a problem that has long troubled just about every coastal community.

The real concern last. I’ve heard it stated like this: “The model will be bad and, even though it isn’t mandatory, it will end up shafting either insurers or NFIP because significant deviations from it will be very subject to court challenges. As a result, a lousy loss allocation system will either cause insurers to pay out billions they shouldn’t or drive up NFIP’s already large debt even further.” Obviously, this is a hypothetical and the way the model is going to be developed—by NOAA scientists rather than insurers or NFIP—seems like a decent quality guarantee. But, it still does seem possible. Given the potential benefits of having a clean, quick system for paying out claims following total losses, insurers would do best to support the bill, pay close attention to the development of storm models, and, if necessary, figure out ways to challenge those models in court if they’re seriously problematic.  But even this seems like a solvable problem. If the model really is bad (and I don’t think it will be) the costs of a single court challenge are much lower than those of paying out lots illegitimate claims and, in the end, litigation could serve a useful purpose in making the system work better for everyone.


I don’t know and have never met Bermuda MP and shadow finance minister Bob Richards but I couldn’t agree more with what he’s saying about the way the way that the OECD doesn’t seem to be giving his country enough credit for its bend-over-backwards efforts to comply with international tax and treaty obligations. International tax and regulatory competition is a good idea and a fact of life in a global economy.


I disagree with most of President Obama’s policies but here’s one thing I think he’s right about: Ketchup, indeed, does not belong on hot dogs.  Ever.

Until next week,

Eli Lehrer, Vice President, Washington, D.C. Operations

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