One reason why Hurricanes like Harvey and Irma cause so much damage is that people keep building and rebuilding in areas where floods are likely. They keep doing it, Matt Welch noted this week in the Los Angeles Times, because they are often being subsidized by the federal National Flood Insurance Program.
“There’s no compelling reason for South Dakota to bail out South Beach,” Welch wrote, reasonably enough. It’s not just because the program is an expensive money-loser for taxpayers. It’s also because the government’s treatment of insurance is actually inducing people to put more property and more lives at risk each time there’s a major storm.
No one likes to hear this message at a time when flood-ravaged areas are beginning, or even still just waiting, to recover. But there’s no better time to hear it. Too many people assume it’s a good idea, almost therapeutic, to put everything back the way it was. But that isn’t always a good idea. Until people start facing this fact, it will keep coming up, again and again, every time a storm or a tough hurricane season hits.
By subsidizing flood insurance and allowing policyholders to pay artificially low prices to insure high-risk properties, the federal government is creating a financial incentive for people to live in places where disaster is bound to strike. If left to the market, several areas where people now live would probably become parkland or otherwise be returned to nature, to the benefit of all involved. In some cases, local governments might find it more prudent to buy out homeowners who face the greatest risk.
The problem is, some of them pay artificially low premiums for flood insurance, thanks to Uncle Sam, and they have no reason to turn down such a sweet deal. In many cases, this is because of grandfathering rules, by which they got low rates locked in before the government drew up realistic risk assessments of the properties they live on.
This is the case (surprise, surprise) for nearly all of the homes whose owners have filed repeated damage claims over the last 40 years. In December, an article in the Homeland Security Affairs Journal estimated that “from 1978 through 2015, 3.8 percent of policyholders have filed for repetitive losses, accounting for a disproportionate 35.5 percent of flood loss claims and 30.5 percent of claim payments.” An astounding 90 percent of this tiny handful of repeat-claim policyholders are paying grandfathered premiums.
Why should everyone else keep paying for this?
In layman’s terms, it means the government’s action is definitely causing a moral hazard; but worse, it is probably contributing to a vicious cycle of ever-more-destructive storm damage and ever-greater danger to human life.
As Welch puts it, “No office-holder wants to be the one to tell existing property owners that their holiday from the free market is over.” But there might not be any better time than now when people are making decisions about whether to rebuild. When Congress takes up the flood insurance program again in December, we hope lawmakers do more than punt the problem to their successors.
