Future Storms Like Superstorm Sandy Could Bankrupt States

November 9, 2012

Hurricane Sandy stormed across the Northeast and caused damage that could exceed $40 billion. This superstorm highlights a disturbing trend: storms are becoming more severe and more damaging to the economies of many states. But rather than blaming the environment for the damaging storms, it may be more appropriate to blame government intervention in the insurance market, say Julian Morris, vice president of research, and Katie Furtick, a policy analyst, at the Reason Foundation.

  • Government intervention has created perverse incentives to build in danger zones.
  • The National Flood Insurance Program, for instance, is the federal government's second largest fiscal liability.
  • Many states run property insurance plans out of the residual market intended to provide a lower cost of insurance for owners of homes and businesses in more risky areas.
  • Such state-run insurance plans are offered through Fair Access to Insurance Requirements (FAIR) plans, Beach and Windstorm plans, or in Florida and Louisiana, state-run insurers of "last resort." This encourages people to build property in natural disaster-prone areas by reducing the costs of insuring against risks such as floods and storm damage.
  • The coastal population rose more than the non-coastal population, in large part due to government disaster insurance programs that encourage people to move to the coast.
  • As a result, when storms hit there are much higher costs to repair and rebuild.

Subsidized insurance has increased the demand for more plans like FAIR, creating more of a problem rather than letting the market correct itself.

  • Since storms such as Andrew and Katrina, the number of FAIR and Beach Plan policies has increased from 931,550 in 1990 to 3.3 million in 2011.
  • The total exposure to loss covered under the nation's FAIR and Beach Plans increased from $54.7 billion in 1990 to $884.7 billion in 2011.
  • Moreover, of the 31 FAIR plans that have data available, 28 have incurred at least one operating deficit since 1999.

States face a fiscal risk because if these insurance programs fail to cover the expenses of damages, the taxpayers are then on the hook.

Source: Julian Morris and Katie Furtick, "Future Storms Like Superstorm Sandy Could Bankrupt States," Reason Magazine, November 6, 2012.

 

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