Policy Studies Catastrophe Insurance

Opportunities to Reduce Taxpayer Burdens from Hurricanes and Storm-related Flooding

Key Points

Many policies, like the National Flood Insurance Program (NFIP), are ironically incentivizing people to put themselves and their property at higher risk.
Rather than focusing on additional spending, good resilience policy should center around how existing duplicative resilience efforts can be coordinated to maximize benefits.
Even if climate change was not a factor, rising coastal wealth is increasing the costs associated with storm-related flooding and damages. Making coastal resilience programs more efficient is good policy, even if we manage to avoid the costs of climate change.
Executive Summary

The value of property at risk from extreme weather events, particularly on coastal lands, is rising. The current annual economic impact from hurricanes and storm-related flooding is $54 billion, $17 billion of which are direct costs to the federal government. The costs of these disasters is anticipated to rise due to the combination of increasing coastal wealth and climate change’s intensification of extreme weather events. Since neither coastal wealth concentration nor climate change is anticipated to abate in the near future, prudent policy should dictate that the federal government revisit its coastal resilience efforts and identify opportunities to mitigate the cost and suffering inflicted by natural disasters.

Current federal policy retains perverse incentives which subsidize flood insurance and thus encourage coastal residents to put themselves and their property at greater risk than they otherwise would if they were fully responsible for their own insurance. These subsidies, amounting to $1.5 billion annually, primarily are to the advantage of wealthy Americans that can afford coastal property.3 Even when updated flood maps (most of which are currently out of date) show heightened risk, government policies prevent any increase in premium and keep the National Flood Insurance Program (NFIP) out of actuarial soundness. The program is currently $20.5 billion in debt, even after approximately $16 billion of its debt was transferred to general taxpayers.

Aside from flood insurance practices that incentivize risky behavior, the federal government is also inefficient in its allocation of existing resources directed to coastal resilience.

In 2018 alone, the Bipartisan Budget Act appropriated $28 billion to the Department of Housing and Urban Development for disaster mitigation and resilience activities.5 The Congressional Budget Office estimates that each dollar of resilience investment avoids $3 of later costs. The Government Accountability Office (GAO), however, has noted that as government resilience efforts are spread across multiple agencies those efforts lack a strategic approach to the allocation of resources. High value resilience efforts are not prioritized, and further a separate GAO analysis that resilience investments may overlook low-cost “natural infrastructure” (mangroves, wetlands and other naturally occurring systems that mitigate flood damage) projects that can have better benefit-cost ratios than conventional resilience infrastructure.

The R Street Institute recommends several policy changes, with the aim of mitigating the costs and harm that result from natural disasters. These recommendations are as follows:

  1. End NFIP subsidies and grandfathered rates for new construction in high-hazard areas.
  2. Wherever possible, transfer risk to the private insurance markets that are better equipped to mitigate risk.
  3. Update flood maps to better identify risk.
  4. Consider how urban development exacerbates flood risk by creating impermeable surfaces and reducing groundwater absorption potential.
  5. Where reasonable, consider if natural systems can more efficiently mitigate risk than artificial ones.
  6. Designate project coordination to a single entity to more efficiently allocate the considerable resources already invested by the federal government in resilience.

Press release: It’s time to reduce taxpayer burdens from natural disasters

Image credit:  FotoKina

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