Houston Disaster and Federal Flood Insurance

Hurricane Harvey that hit Houston is a classic case study about what happened when governments start giving wrong financial incentives to the people. Hurricane Harvey may seem like a natural disaster, an act of god, which could not have been prevented. This is true but only to a certain extent. It is true that we as human beings do not have any control over natural phenomenon like hurricanes. However, it is also true that the paths of hurricanes are predictable to a certain extent. Hence, if we are building properties in what is a known hurricane-prone zone, then we cannot say that the losses were unforeseen.

In this article, we will understand how the government itself encouraged the building up of properties in this hurricane-prone zone. From the looks of it, it might seem that providing subsidized flood insurance might solve the problem. However, in reality, it is the subsidized flood insurance which has caused major damage in this Hurricane Harvey.

Why has Hurricane Harvey Caused so Much Damage?

Houston is known for having lax zoning laws. The city allowed people to build houses in the wetlands. There were no special provisions taken to avoid flooding of homes or entire neighborhoods in case there is a hurricane or excessive rainfall. All cities expand and acquire land when they do so. However, in Houston’s case, the local government did not take any efforts to ensure that the city would be safe in the vent of a natural disaster.

Also, less than 25% of the houses that were damaged during the hurricane were insured. This means that the cost of the damage will have to be borne by the people themselves. Government is helping people during the emergency situation. However, once the calamity ends, the question remains whether the government must pay the private homeowners to rebuild their homes with taxpayer dollars. If the past track record is to be believed, it is unlikely that the federal or state government will do this.

Why Don’t People Buy Flood Insurance?

The abysmally low rate of insured people in case of Hurricane Harvey is no coincidence. If there were an earthquake instead of a hurricane, the number of insured households would have been much higher. Almost all the houses in that region had insurance against fire, theft, earthquakes, etc. This insurance was not expensive and would cost the typical family about $1000 per year. Hence, a lot of people were insured.

However, flood insurance in this area was expensive. This is because it was a known wetland. Hence, even though all other risks were covered for $1000 per year, flood insurance came with a price tag of over $5000 per year. This ensured that the insurance was out of reach for most people. Since these places had such high risk, a lot of the times, private insurers simply wouldn’t provide housing insurance at these places.

This is where the government stepped in. They started heavily subsidizing the flood insurance policies. Hence, even the people that brought these policies did so on taxpayer dollars. The government, therefore, used taxpayer dollars to enable people to stay in a location that they shouldn’t have stayed at all! Ironically, now the government will compensate the same people for the loss of life and property!

The Problem with Subsidizing Flood Insurance

Several politicians are using Hurricane Harvey as a pretext to get the government to provide even more subsidized, possibly free flood insurance policy. However, there are several problems with this policy.

  1. Waterfront Properties Aren’t owned By the Poor: Firstly, waterfront properties are not owned by the Average Joe. They are owned by people who belong to the middle to upper-class households. Hence if the flood insurance is subsidized anymore, it will have the effect of taking out money from the pockets of the poor people and giving it to the rich. This is exactly opposite to the principle of progressive taxation which is followed worldwide. Hence, the government should not encourage more constructions in these wetlands by paying for the insurance of the residents.

  2. Creates a Bad Precedent: The problem with giving more insurance in the flood-prone areas is that it sets a bad precedent. The government does not have the money to pay for all the commitments it is making. Hence, it must stop making these commitments. The federal government is insuring almost all the dangerous places in the country. As a result, it is paying out $25 billion more in claims than it is receiving in premiums. It would be prudent of the federal government to reduce its liabilities. Increasing the liabilities would make no sense especially since human lives are being endangered by building in the wetlands.

  3. Environmental Disaster: Lastly, if waterfront properties are heavily subsidized, they will spring up everywhere. The problem is that with global warming going on, this could be dangerous. The sea levels are rising across the world and soon many properties that are today half a mile away from the coast will be under water. Private insurance companies are aware of this fact. Hence, they do not cover these areas at a low premium. It’s time for the government to wise up and avoid picking up liabilities. It is neither good for the people who stay there or for the taxpayers in general.


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