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Perverse incentive; Federal flood insurance program subsidizes risk.


With the Midwest trying to recover from devastating rains and the Gulf Coast still struggling to recover from the lethal one-two punch delivered by hurricanes Katrina and Rita two years ago, the threat of flooding to life and property has been much in the news. Yet, policymakers show little inclination to address one of the factors that contributes to the devastation: a federal flood insurance program that encourages people to build and rebuild on barrier islands and floodplains.

The damage wreaked by Hurricane Rita in 2005 is a case in point. Galveston, Texas, on a low-lying barrier island, has flooded repeatedly, notably in the infamous 1900 hurricane that virtually wiped out the city. The same pattern has occurred at the Outer Banks of North Carolina and other high-risk locations. After the Northeast was battered by one winter storm in December 1992, taxpayer-subsidized insurance paid some $175 million in claims, enabling homeowners in vulnerable areas - including the aptly named Marshfield, Mass. - to rebuild.

Despite repeated proposals to eliminate such perverse incentives, efforts to align flood insurance premiums with the actual risk have yielded scant results.

It's no mystery what has to be done. Tougher land-use policies must be enforced. Flood maps must be updated so property owners can assess their risk. Premiums for the 5 million holders of subsidized flood insurance policies must be raised to make the program self-sustaining.

A bill passed by the House Financial Services Committee last month points the way, although it takes only baby steps in the right direction - falling far short of what needs to be done to discourage, not perpetuate, the dangerous, costly flood-and-rebuild cycle.
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Title Annotation:EDITORIAL
Publication:Telegram & Gazette (Worcester, MA)
Article Type:Editorial
Date:Aug 30, 2007
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