Free-market reforms could save Louisiana from catastrophe, Pelican Institute paper finds
BATON ROUGE, La. (Feb. 5, 2015) – Louisiana’s unique coastal vulnerabilities will require the state to pursue sensible free-market reforms to its insurance markets and built environment to avoid catastrophic costs in the decades ahead, R Street Senior Fellow Ian Adams writes in a new policy paper published by the Pelican Institute.
Projections from state and federal officials estimate the state can expect 30 to 40 hurricanes over the next century with annual flood-related losses of between $7.7 and $23.4 billion, Adams wrote. Due to a variety of trends – including natural tectonic subsidence, human development and rising sea levels, it is estimated that Louisiana’s Southeast corner may be submerged beneath at least 4.3 feet of water by the end of the century, he notes.
Given that backdrop, unless steps are taken to stem the development of vulnerable residential and industrial sites, losses could be overwhelming, Adams argues. He points in particular to distortions in the state’s insurance market that encourage building in risky areas, including rules limiting insurers ability to cancel policies; the sheer size of the state-run insurance authority, Louisiana Citizens Property Insurance Corp.; excessive controls on insurers’ ability to raise rates to reflect risk; and the impact of the subsidized coverage offered by the federal National Flood Insurance Program.
“To expand insurance options and to increase the number of Louisiana residents adequately covered, Louisiana must normalize the way insurers can do business so that the state can rebuild after future severe weather events,” Adams writes. “In short, regulators must allow prices to direct how and where people live and builders develop. The market can and should be allowed to solve the problem.
Among the solutions Adams outlines are reforms to move the state to a modified flex-rating system of insurance rate controls; expansion of tax credits and abatements for property owners that invest in risk mitigation; and plans to invest funds the state expects to receive through the federal RESTORE Act in wetlands restoration and other durable projects to reduce Louisiana’s vulnerability.
“Instead of controlling development through controversial and sure-to-fail centralized planning mechanisms, Louisiana should seek to modify behavior by allowing its residents to understand the true cost of the risk that they face,” Adams writes. “If available to them, the true cost of living in a dangerous location will at once promote awareness of danger and encourage economically rational decision-making.”
