America’s flood insurance system is doomed to fail

2 comments

1. >In addition, homeowners aren’t keen to find out their house is now suddenly in a flood zone, which means they may have to buy flood insurance, their property value could drop, and if they want to sell, it could be difficult to find a buyer. That’s why some property developers have lobbied to change federal and state flood risk assessments to downplay the dangers to their real estate.

   Yeah, that’s the problem. The values should drop, and if they’re not, they’re being help up by various budgets. That’s a type of subsidy … a subsidy to have a house in a place that’s not fit for houses. If we can criticize “to big too fail” for banks, we should be able to criticize “to big too fail” for other cases, because that’s what this is. Money can be better used to develop social housing in better locations, instead of subsidizing the “home owner” class getting richer.

   > Jonathan Scott, an assistant professor at the Jindal School of Management at the University of Texas Dallas, coauthored a [paper](https://www.journals.uchicago.edu/doi/10.1086/726155) last year that found that NFIP was actually encouraging more people to move to high-risk areas for flooding. “We’re looking at this moral hazard where if risk is priced below the actuarially fair level, it’s going to encourage an inefficient level of migration to these locations because consumers are essentially getting a bargain on this,” Scott said. “A lot of these properties were getting charged like $500 premiums when they should have been something closer to like $5,000, $10,000, or something like that.”

   …

   >> Thus, our findings suggest that the private benefit households receive in the form of a reduction in potential risks produces adverse behavior, imposing significant external costs. (from the paper)

   Failure to reign in this “system gamers”, as usual, leads to the system’s collapse… such as nobody getting insurance because the insurance system crumbled or the prices are totally unaffordable.

   >In 2011, after Hurricane Ike, the Houston suburb of Clear Lake installed signs around town showing that storm surge could reach as high as 20 feet. But residents complained that the signs were hurting property values and they were soon taken down. Houston itself has built up thousands more properties in flood-prone areas since Harvey. The local flood control district is still using old flood maps that predate the damage revealed from the storm.

   …

   >The real challenge is for states and local governments to say no to new buildings and pulling people back from existing structures in high-risk areas. In places like Florida and Texas that don’t have income taxes, the states get much of their money from property taxes, which gives state lawmakers an incentive to encourage more property development, particularly in high-value areas like riverfronts and coasts. “If you think about these communities just in terms of economic incentives, the tax revenue that they’re going to get from this high-value home that’s got this beautiful view of the water, that’s a big boon to the community,” said University of Georgia’s Ragin.

   It’s a boon until it’s a liability.

2. all insurance is doomed to fail.

   health, car, flood, fire, quake, home, renters, etc.

   only the rich will be able to “self insure”

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