Why Should the Feds Provide Flood Insurance?

Kip Esquire asks, quite sensibly, how risk-rated flood insurance is any different from any other type of insurance? Why don't private insurers provide it?

Perhaps because the private insurance industry would never tolerate an insanity such as this:

A major public policy issue before the 109th Congress is the cost to the [National Flood Insurance Program] of paying for repetitively flooded properties ["RLPs"]....In total, there were 4,498,324 flood insurance policies [as of September 30, 2004] — so RLPs are 1% of the total policies nationwide. Yet, according to FEMA, this 1% accounts for an annual average of 30% of amounts paid in claims.

If you're a "repetitively crashing driver," you're banished to a high-risk insurance pool with appropriately higher insurance premiums. Eventually, you're barred from driving altogether.

Could you imagine trying to run an auto insurance company where 1% of drivers were responsible for 30% of claims? Or a health insurance company? Is the private insurance industry unable to provide flood insurance because of market failure (as the government would have you believe), or merely unwilling to provide it because of public policy irrationality in tolerating repeat victims?

The primary answer I receive when I ask about subsidized flood insurance is, "Well, we need it. We couldn't afford to live here if we had to pay private companies to provide insurance for us."

Exactly. People living in high risk areas want others to subsidize them for living in those areas. And, sadly, politicians offer to do it.

Where is a politician who will say, "I'm glad you like living there; I hope you are willing to pay the full costs of doing so."

Related digression: I attended a seminar last year in which some economists carefully analyzed some economic effects of something having to do with emergencies (I don't recall the details). When I asked them about the location decision and how it is affected by FEMA, they said they had ignored it because they couldn't figure out how to include it in their model.

Quite frankly, I think risk, insurance, and the location decision are pretty important. People who wish to live in high-risk areas should be expected to deal with these questions in the future. They should not expect that others will bear the downside risks.

That is not to say I am opposed to aid for storm victums. Regular readers of this blog know otherwise. Rather, I am saying that in the future, the subsidy from the general taxpayers in the form of under-priced insurance should not be available.

Update: Kip Esquire has posted even more here.