The reaction to Superstorm Sandy’s $65 billion in damage has been the predictable doom and gloom about climate change and rising sea levels. But instead of implementing draconian restrictions, we can prevent loss of life and property by eliminating insurance of last resort.
Extreme weather is nothing new. Paris was flooded on a regular basis by the Seine River until Napoleon III built walls for flood prevention. But while it was logical for earlier generations to live on higher ground away from major bodies of water, it now seems logical to us to build as close to the ocean as possible. Boston, New York City and much of the population in the state of Florida is flood prone. Between 1970 and 2000, East Coast areas grew in population. When four hurricanes hit Florida in 2004 and Superstorm Sandy hit the northeast in 2012, many people incurred major property losses.
Insurance companies made poor decisions to cover some of these properties. But most companies have adjusted their portfolio. Yet instead of letting the market work and forcing folks who rebuild homes on barrier islands to go without coverage, many states stepped into the game by providing insurance of last resort. Premiums for these policies are offered below market rate with taxpayers subsidizing the difference. For example in Miami-Dade County, FL the insurance premium on a $150,000 house with Citizens (the Florida insurer of last resort) costs $4,600. With a traditional insurance company the premium is $10,000. Worse, some states actually encouraged the private sector to dump questionable policies into the last resort pool.
If private insurers cannot provide insurance to certain coastal location, this is a signal that building a home in this location is a poor decision. And if one of these homes is going to get damaged by the next storm, it is not a good policy decision to encourage folks to live there. If the private sector cannot provide insurance to folks building new homes, the government should not provide it either. Current homeowners can be transferred over time to the private market, assuming they do not get hit by multiple storms. Potential owners can still build in hurricane prone areas, but taxpayers should not bail them out when the inevitable next storm strikes.