Our old colleague at the Heartland Institute, Steve Stanek, has a great piece this week in The Washington Times on the laughably named “Taxpayer Protection Act,” the latest version of the old Beach House Bailout that has been floating around in Congress like so much flotsam ever since the mid-1990s.

The bill would create a federal system of government-backed reinsurance and loan guarantees to state-sponsored catastrophe funds and insurers-of-last-resort, such as the woefully mismanaged Citizens Property Insurance Corp. in Florida or the Texas Windstorm Insurance Association. It’s really a bailout fund for these and other states that run their own property insurance programs.

The system would artificially hold down insurance premiums in California, Florida, Texas and other states with significant catastrophe exposure, particularly on the coasts where the risks are greatest. It’s another try at what analysts call a “beach-house bailout.”

The bill is a typical government response: It sees only the big picture and fails to understand that society is made up of individuals. There is a real sense, after all, that there is no such thing as a market or economy.

While sponsors of the bill disingenuously claim it would serve to “pre-fund” federal responses to natural disasters, Stanek recognizes that insanity of this claim. Federal outlays in the wake of major responses come overwhelmingly through the Stafford Act and in payments of claims from the National Flood Insurance Program. Rep. Albio Sires’ bill does nothing to increase funding for, or reduce the liabilities of, either of those programs, but instead creates an enormous new federal program that could be on the hook for billions after a major storm. The real goal, of course, is to force areas at comparatively lesser risk of earthquakes or hurricanes to pick up the tab for state-sponsored insurance mechanisms that charge sub-market rates. And, as he notes, this would have the effect of encouraging even more development in the riskiest areas:

History tells us people whose risks are lessened will take more risks. What is the sense in reducing the costs of insurance to make building in high-risk hurricane-, flood- or earthquake-prone areas easier to do? How can anyone believe it is proper to force a family in, say, North Dakota to pay an insurance premium for a hurricane risk that does not exist in North Dakota?

If someone else covers the costs of the risks they take, people will take more risks. This means more construction in risky areas, more building in environmentally sensitive places, and more damage when the next natural disaster hits.

What we really need is higher insurance premiums for those who choose to build in risky areas. Allowing insurance premiums to reflect higher risks will discourage people from settling in high-risk areas.

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