November 9 2012
Shoddy Government Insurance Policies, Not Storms, are What Bankrupt States
Vicki E. Alger
More bad weather’s ahead, and human beings are to blame—but why may surprise you. In this month’s issue of Reason Magazine Julian Morris and Katie Furtick explain that the number of devastating storms is not increasing, but the cost of their devastation is:
There are two main reasons for this. First, we have become much wealthier: inflation adjusted average per capita income in the U.S. rose threefold, from $13,250 in 1960 to $39,800 in 2008. Second, the number of people living along the coast has increased dramatically: from 1960 to 2008 coastal population rose by 84 percent…As a result, there is simply more valuable property in coastal areas that is likely to be affected when a big storm hits.
More and wealthier people living in places with beachfront views isn’t a problem—if those same people who are willing to bear the full brunt of storms were also required to bear the full brunt of the cost when their property is damaged or destroyed because of those storms. But they’re not because of the perverse incentives introduced by (yet more) well-meaning federal programs intended to help low-income home and business owners move to less developed areas, as Morris and Furtick continue:
One reason coastal population rose more than non-coastal population is that government disaster insurance programs have actively encouraged people to locate close to the coast. In addition to the National Flood Insurance Program, the federal government’s second largest fiscal liability next to Social Security, many states run property insurance plans out of the residual market intended to provide a lower cost of insurance for owners of homes and businesses in more risky areas, which would normally be difficult or impossible to obtain in the private market. Such state-run insurance plans are offered through Fair Access to Insurance Requirements (FAIR) plans, Beach and Windstorm plans, or in Florida and Louisiana, state-run insurers of “last resort.”
FAIR was established by the federal government as part of an urban redevelopment program following the riots of 1968, with the express intention of encouraging people to buy property in depressed areas. The plans do that, but by reducing the cost of insuring against risks such as flooding and storm damage, they also encourage people to build properties in storm and flood-prone areas. That increases the damage done when a storm hits.
Julian Morris and Katie Furtick recommend that cash-strapped states start their disaster planning now, they should not issue new insurance policies and let current ones expire. “That would force property owners to seek insurance on the private market, or move.” It would also let taxpayers who are helping subsidize the ill-advised choices of others off the financial hook.