Flood Insurance, debt monster

[PDH]

...we are not going to nisure you!

My sentiments exactly.

[DGuller]

Berkut raises good questions, all of them.  Too bad they're unlikely to be answered where it counts.

[The Minsky Moment]

The government will just have to suck it up or vast swaths of the country will be uninhabitable. That's just how it is.

I bet that 95% of the area of the USA are in no danger of ever being flooded.

I bet at least 50% of the population of the USA has some vulnerability to flooding.  Maybe more since lots of major cities are built on coasts or river banks.
Its probably true that flood risk is minimal thousands of miles up the in the Rockies or in the middle of the high desert of the Colorado plateau but it isn't that realistic to move the whole US population in such regions (not to mention the huge water supply problems that would result).
Meanwhile, those areas not in danger of flooding face other catastrophic risks.  Like earthquakes and tornados.

[DGuller]

I bet at least 50% of the population of the USA has some vulnerability to flooding.  Maybe more since lots of major cities are built on coasts or river banks.
Its probably true that flood risk is minimal thousands of miles up the in the Rockies or in the middle of the high desert of the Colorado plateau but it isn't that realistic to move the whole US population in such regions (not to mention the huge water supply problems that would result).
Meanwhile, those areas not in danger of flooding face other catastrophic risks.  Like earthquakes and tornados.

What conclusion are you heading to with this?

[The Minsky Moment]

What conclusion are you heading to with this?

It's cheaper to pay a few billion every half-decade or so than to abandon half the metro areas in America for higher ground.

[Zanza]

Hey, I am an Euroweenie. Of course I agree with your conclusion.

I just wanted to refute Tim's argument for the sake of it. I thought that's Languis what Languish is about.

[DGuller]

What conclusion are you heading to with this?

It's cheaper to pay a few billion every half-decade or so than to abandon half the metro areas in America for higher ground.

Who says you need to abandon them?  Just have the residents pay the actuarially fair premium to choosing to live in a flood zone, so that you don't subsidize idiotic development.

[Berkut]

What conclusion are you heading to with this?

It's cheaper to pay a few billion every half-decade or so than to abandon half the metro areas in America for higher ground.

This is exactly the kind of non-response response I am talking about.

Talk about a classic false dilemma. Abandoning half the metro area or taking on the entire cost of all flooding damage in America on the shoulders of the government and taxpayers is not the only two options.

[Berkut]

What conclusion are you heading to with this?

It's cheaper to pay a few billion every half-decade or so than to abandon half the metro areas in America for higher ground.

Who says you need to abandon them?  Just have the residents pay the actuarially fair premium to choosing to live in a flood zone, so that you don't subsidize idiotic development.

I don't even mind that idea that the government is in the business of subsidizing this "insurance" when it comes to covering the really big disasters.

But you are exactly correct - there must be a cost associated with building in higher risk areas, and that cost must NOT be hidden, or else we will get...well, we will get exactly what we have now, with examples of people being reimbursed over and over and over again for the same loss because there is no reason for them NOT to build in places they have no business building.

Take the example of someone wanting to build a vacation home. If you want that vacation home on the Outer Banks, good for you - but why should I have to bear the cost for the inevitable replacement bill for it? The cost to replace your house in the next 20 years should be factored into how much house you can afford via your insurance premiums. I am fine with those going through the government if private insurance companies won't touch it, but I do NOT agree that the cost should be born by anyone other than the person who wants to build or buy a house in a known high risk area, if no other reason than it will create perverse incentives.

[DGuller]

When it comes to property/casualty insurance debates, there is one iron-clad bullshit-detection rule.  Whenever you hear about earthquake risk or tornado risk or meteor strike risk in the rest of US, be prepared for a bucketful.  You're about to be subjected to a logically-contorted argument about why it's not unfair for a certain group of people to be subsidized by other policyholders or taxpayers (most of the time it will involve Floridians living on the coast).

[MadImmortalMan]

Clearly, people need to stop trying to live in New Jersey.

[Razgovory]

Wouldn't the cost be passed on to everyone then?  I mean cities on the sea shore are usually there for a reason.  If you are going to charge more for people to live in in a place like a port, wouldn't they just pass the cost on in every product that moves through that the port?

[DGuller]

Wouldn't the cost be passed on to everyone then?  I mean cities on the sea shore are usually there for a reason.  If you are going to charge more for people to live in in a place like a port, wouldn't they just pass the cost on in every product that moves through that the port?

Possibly, but so what?  If you buy products from China, you're in effect contributing to creating the need to have a port in a dangerous place, thus giving rise to that cost.  It's a lot more fair for you to pay extra for that, than for a taxpayer who buys only American.

[Zanza]

Wouldn't the cost be passed on to everyone then?  I mean cities on the sea shore are usually there for a reason.  If you are going to charge more for people to live in in a place like a port, wouldn't they just pass the cost on in every product that moves through that the port?

Don't most Americans have a commute of several miles? There is no reason to live right on the waterfront even if you work in a port. I am sure that ports are by default flood threatened, but then I guess they can more easily afford the necessary insurance than private citizens. I don't see any problem with ports putting their extra insurance cost onto their prices.

[The Minsky Moment]

Who says you need to abandon them?

That was the toungue-in-cheek implication of zanza's post; otherwise the fact the much of the raw land mass of the US lies outside floodable areas would be of no relevance.

Just have the residents pay the actuarially fair premium to choosing to live in a flood zone, so that you don't subsidize idiotic development.

Ok but what is the fair premium?

If you look at the loss experience over the 20 year period from 1991-2010, the total claims paid out was about $35 billion, or 1.75 billion per year.
If you just focus on the last 10 years, it increases to over $2.8 billion per year, mostly due to the influence of 2005, in which over $17 billion was paid out in that year alone.  In most years, less than $1 billion was paid out.

The past loss experience suggests that the current $3.5 billion premium level should be sufficient, at least if we can cut down on the $1 billion the private insurers are skimming off the top.

But it may be objected that due to changes in the earth's climate, there is reason to believe losses may increase in the future; thus, it would be prudent to raise premiums.  That is a legitimate suggestion.  However, to the extent the higher loss experience is driven in part by people all across the US burning carbon, I would query whether 100% of that impact should be internalized solely by those living in flood-prone areas.  If, e.g. collections need to go to $4-5 billion (an increase of 15-40%), might it be fair to propose that half the premium increase be absorbed by the policyholders, the other half funded by part of the proceeds of a carbon tax.