Florida’s home-insurance business was in trouble even before Hurricane Ian tore across the state last month. Big insurers were taking their business elsewhere, smaller ones were going broke, costs due to litigation and fraud had soared, and so had premiums. The private market was pulling back as the risk of weather-related damage mounted, leaving homeowners to buy protection from the state-backed Citizens Property Insurance Corp. and the federal National Flood Insurance Program — or else to go uninsured.
This creaking system could be flattened altogether by Ian. Expect an epidemic of new litigation as insurers and policy holders fight over what destroyed their homes. (Standard policies cover damage from wind but not from flooding.) Costs to private insurers alone could reach $63 billion. This worsening mess proves, for the umpteenth time, that rebuilding homes and other structures isn’t good enough: The public and private treatment of weather-related risks needs to go back to the drawing board.
When the hybrid public-and-private insurance market meets current policy on disaster relief and resilience, the result is mispriced risk, misallocated investment, and a mounting toll of suffering and cost. Climate change is adding to the danger of severe storms, yet the current approach discourages responsible choices on what gets built and where. The errors pile up, and the system promptly validates them.
Insurance is a crucial part of the problem. Correctly priced protection for buildings in high-risk areas would be unaffordable for many low-income households. This squeezes the private market and leads the federal government to cover flood-related risks, often charging premiums lower than they should be. Put that another way: The federal government helps families live in places that jeopardize their own (and everybody’s else’s) wealth.
Crazy as that sounds, the apparent alternative is hardly better. Price insurance more accurately and more people would simply choose to do without it. When disaster strikes, their assets are wiped out, and taxpayers are still on the hook for emergency relief and many other kinds of ongoing fiscal support.
Layer upon layer of hidden subsidy pushes the same way, separating choices and their consequences. Mortgage securitization, for instance, obscures differences in location-based risks attached to particular loans, meaning that borrowers in low-risk places end up supporting those inclined to gamble. (Fannie Mae and Freddie Mac, taxpayer-supported quasi-government entities, helped develop this model.) Another example: When infrastructure is rebuilt after a hurricane, the cost isn’t confined to those who like the odds of living in a high-risk area. The list is endless. Despite its narrow focus, one recent study counted numerous actual or proposed federal policies on weather-related disasters that invite added risk.
No doubt, the political obstacles to better aligning risks and incentives are daunting. A pattern invariably repeats itself: Disasters strike, public funds (understandably) flow to help the victims, and the underlying problems only get worse. Still, policy makers owe it to voters to look beyond relieving the immediate hardships and attend to fundamentals. An approach that prioritizes rebuilding and carrying on as before, rather than reducing risk and improving resilience, is a formula for continually escalating harms.
A comprehensive rethink is essential. The government needs to understand how its pre- and post-disaster interventions interact, and get its countless agencies and programs on the same page. Gather and disseminate location-based information about climate-related risks; use that information to guide infrastructure investment; and so far as politics allows, confront businesses and households with the true costs of their choices. Curbing subsidies through the federal flood-insurance program is difficult but indispensable. Urge or require property owners in high-risk areas to insure themselves. Oblige states to cover a bigger share of recovery spending. Condition new federal investment on disaster-planning and mitigation.
After a climate-related disaster strikes, getting back to normal should no longer be the overriding goal. Help the victims, to be sure. But concentrate as well on ensuring that next time, they’ll be fewer and better prepared.
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The Editors are members of the Bloomberg Opinion editorial board.
