In the past year, the Federal Emergency Management Agency (FEMA) reports that there have been 66 declared flood disasters in America. That works out to an average of 5½ flood disasters a month.
Some of those disasters were associated with tornadoes, mudslides and strong winds, and they ranged from Puerto Rico to Alaska, and California to Maine, but most were simply predictable heavy rainfall leading to rivers and streams overflowing their banks. For the most part, these are not Hurricane Katrina “once-in-500-years” events. In fact, most of the floods are fairly predictable because the same area has been flooded in the past, and some precautions have been taken to reduce the severity of flooding in the future. These people knew there was a risk of being flooded, and they decided to take the risk. (Note: This isn’t true of some flood events, like hurricanes. One estimate shows that the majority of properties at risk from flooding due to Hurricane Irene are not located in FEMA flood zones, but that doesn’t apply to most floods.)
In part, economists think people take the risk because they know that any benefits coming from locating there will come to the private property owners and costs will be absorbed by the taxpayers. In economic terms, they have privatized the profits and socialized the losses.
Should the public continue to subsidize this behavior?
These floods cost billions of dollars, as well as killing and injuring many people, including rescue workers trying to save the property owners and residents who are endangered when it does flood. And a lot of those costs are paid by the taxpayers. Private insurance companies provide almost no flood insurance, because the insurance industry recognizes the huge risks. Instead, FEMA, which operates the National Flood Insurance Program (NFIP), provides the overwhelming majority of all flood insurance. (Most of the private insurance companies that do offer flood insurance are really agents for the NFIP.)
And the NFIP is broke. In fact, FEMA’s NFIP owes the Treasury nearly $18 billion, and is nearing the Congressional cap of $20.8 billion––which was raised after the hurricanes of 2005 “broke the bank.” Early estimates are that Hurricane Irene may add another $10 billion losses to the already astronomical cost of flooding in the last 12 months. And that is causing severe heartburn in the Capitol.
One of the reasons for that is that insured property owners may only pay $600 a year for coverage from NFIP (or as little as $129 if they get the subsidized rate), and the average claim is $34,000. That means there would have to be about 60 insured parties (paying the unsubsidized rate) for every claim for the system to break even. And yet, it is reported that in all of Vermont, one of the states hardest hit by Hurricane Irene, there were only about 3,700 flood insurance policies.
Of course, payments from the NFIP are only a small portion of the total cost of floods. First, most property owners do not have flood insurance, from NFIP or any other source. There are also public costs associated with damages to roads, bridges, water and sewer systems, power systems, and the costs of deploying the National Guard and other emergency personnel.
The NFIP is supposed to be self-supporting, with property owners paying premiums to buy insurance, but over one-fifth of the policy holders receive premium subsidies of 40-45 percent. And that subsidy is encouraging more people to move into dangerous floodplains, despite the risks.
The bottom line is that the taxpayers subsidize the development of property located in known floodplains. And that raises the question of whether that subsidy is good public policy, or whether the whole approach to flood emergencies should be changed. Would we all be better off if we ended the NFIP and instead provided short-term subsidies to floodplain property owners to move out of the danger zone, avoiding the inevitable loss of property and lives that occur so predictably along the nation’s waterways?
At the very least, it seems that FEMA should end subsidizing the NFIP premiums for any insured property owners. And it may be a good idea for the states (which control land use) to prohibit construction within floodplains, or require any owner of property located in a floodplain to carry insurance to reimburse public agencies for emergency services when floods do occur. Just as property owners in high wildfire risk areas must pay for protection against fire damage, those who are known to take the extra ordinary risk of being flooded and needing rescue or other emergency services should be required to pay for those services, which will not be needed by all members of the community. (Currently, some property owners are required to buy flood insurance, but only if they borrow mortgage loans from federally regulated lenders. And, if property is flooded, the owner can still obtain insurance coverage after rebuilding, leading to repeat claims.)
So, what it finally comes down to is whether insuring people against their own choices is an appropriate role for government:
Should the public at large––the taxpayers––continue to pay to rescue people who take the risk that they won’t be flooded by the next big storm?
Or should the subsidy end? Should NFIP insurance premiums be raised to levels that would fully cover the risk (in which case many more property owners would choose to drop their insurance, because they couldn’t afford it or just believe that it isn’t worth the cost)?
Or should the people who choose to live in dangerous places like floodplains be required to reimburse the taxpayers when the inevitable emergency happens, when the local, state and federal governments spend millions, sometimes billions, of dollars to rescue those endangered and repair the damage?
Should the whole idea of public insurance against disasters be abandoned, as some are proposing?
There are good arguments on both sides of the debate. What do you think?