Wednesday, September 6, 2017

Time to Mandate Flood Insurance?

Houston is barely drying out in the aftermath of Hurricane Harvey.  Water, water is everywhere and the media are themselves flooded -- with stories.

Good, uplifting stories about heroism and lines of people heading to Texas with boats to help in the rescue effort.  Sad, tragic stories of people lost in the hurricane, the flooding and the attempted escapes.  Stupid, political stories trying to make a case for fixing that bad, evil global warming that somehow must be associated with everything on earth, whether it is true or not.

A real challenge, of course, and the topic of this rumination, is insurance, specifically, the fact that some 80% of the people who otherwise would have flood insurance and got flooded, did not have it.  This is sad for them, and particularly sad that they are now at the mercy of charitable organizations, FEMA and any other possibility beyond their own savings, to rebuild their homes to the extent they can be rebuilt, and their lives to the extent they have to be.

So flood insurance.

I have it.  I live a couple miles from the ocean as the seagull flies, but I am not technically in a flood zone to where state or Federal law requires that I buy it.  So it is not particularly expensive to have, and there is certainly peace of mind that when hurricanes pass through here, as they do, I'm at significantly less risk of financial ruin than I would be otherwise.

Living in an at-risk area is a risk, let's face it.  And the problem is that when FEMA is out there cleaning up, and then the loan part of FEMA has to follow up and provide loan funds that those who have damaged homes, well, it is a drain on the taxpayer having to provide those funds, even if they are supposed to be paid back.

And on top of that, there is already mandated Government flood insurance in certain areas as well.  It would not have applied to Houston, of course, which is not an on-the-coast city like Miami or Boston -- or Galveston.  But it is out there, and not the most popular thing with those of us who don't understand why the government is doing actual commerce and competing with the private sector.

I'd like us to step back and look at this.  What do we want to accomplish?

I don't think the answer should be too hard, and it should be a relatively universal one.  It is this -- we want to ensure, to the best extent possible, that people who live in areas susceptible to flooding, have insured themselves adequately against that possibility to protect the taxpayer.  So how is that done?

Well, let us start with the fact that there are three entities involved here -- the government, which has the legislative power to implement solutions (and even there we have federal and state governments to apportion responsibility to); the insurance industry, which actually knows how to run an insurance program; and the homeowner.

I am not at all a fan of the Obamacare mandate that says that you, you and you must buy health insurance.  I want the right to self-insure or not insure at all, and if I can't afford care I might die from lack of treatment -- but it is my decision and affects no one else.  I'm not expecting the government to bail me out if I eschew health insurance and get sick anyway.

But I regard floods as a separate issue.  We do have an entity -- FEMA -- that will spend taxpayers' money if there is a flood.  If I have purchased commercial flood insurance from an insurance company, I don't need FEMA.  If I live in an area that repeatedly floods, I believe that the taxpayer needs protection from me.  That's right; it is not up to the taxpayer to make up for the fact that I exposed myself to a legitimate risk and was too cheap to buy insurance against a known hazard.

We already have laws that mandate flood insurance in certain areas; there is a precedent.  There is also a precedent for moral outrage when some clown builds a home on a cliff and expects the taxpayer to pay him for his loss when a mudslide pulls his home into the Pacific. No, there is actually one right answer there, and it is the open market -- you buy insurance against your home falling into the ocean, and it is more expensive than it would otherwise be if you choose to put that home on a cliff.

There is a part I can't answer, and that is the Houston problem -- who has to buy it?  When we mandate that those at risk must buy flood insurance, how do we define who is at risk?  We know that if you're 20 miles from the nearest trickling stream, in the middle of the Great Plains, maybe you don't need to be forced to buy it.  Lots of people in south Texas didn't think they needed it either, but son of a gun, they did, didn't they.

The nice part of the free-market economy is that everything has a price.  I mean, I'll be happy to sell a flood policy to that guy out in the Great Plains for $8.50 a year -- the price is going to reflect the risk; that's why we have actuaries.  Little risk means minuscule premiums.  So we could indeed mandate that everyone owning property must have flood insurance, and the premiums will end up tied to the risk of your zip code or your block.

I guarantee you that if all America had to buy flood insurance, there would be insurance companies offering $10 a year policies in zero-risk areas.  No one would have to worry about being gouged, at least as long as the free market is allowed to operate.

So why is this mandatory flood insurance OK and Obamacare is not?  Well, it all comes back to the idea of responsibility, and who manages risk.  If I do not have health insurance but get sick, then the burden is shared by me and by the extent to which hospitals cannot refuse to provide basic care.  Additional costs borne by the medical system are factored back in to pricing, so it does affect costs to unaffected patients who did have insurance, but it is inside the system -- i.e., not a taxpayer connection.  Uninsured flood victims have only the taxpayer to turn to.

These are curious points to make, and it does make you wish there were a forum for a national debate, of the kind that, well, never happens because we are not capable of having one, as I wrote here.  In my dreams, Congress is that place.  In my nightmares, Congress is that place.

Let me make sure I paid that insurance premium, OK?  See you tomorrow.

Copyright 2017 by Robert Sutton
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