Subsidizing Disaster

Subsidizing Disaster
April 1, 2000


The Clinton administration, hard at work to avert the horrors of global warming and urban sprawl, also has been busy passing out disaster relief money like it was campaign literature.

Since 1996, the White House has declared, on average, at least one region of the United States a disaster area per week. The number of "disaster" declarations has doubled since 1994.

On February 17, as this issue of Environment & Climate News went to press, the White House had released the following statement:

“The President today declared a major disaster exists in the State of Alaska and ordered Federal aid to supplement state and local recovery efforts in the area struck by severe winter storms and avalanches beginning on December 21, 1999, and continuing.”

Two days earlier, the President declared “major disasters” in Louisiana (a severe winter storm) and Georgia (severe storms and tornadoes) “and ordered Federal aid to supplement state and local recovery efforts.”

According to Phillip J. Longman, “This largess is part of a much broader and increasingly controversial phenomenon of growing direct and indirect subsidies to business and residents in hazard-prone regions. Longman is the author of “By the sea, subsidies: Are America’s disaster policies completely disastrous?” which ran in the October 4, 1999 issue of U.S. News and World Report.

The absurdity of the federal government’s disaster relief program reached new heights last fall, when Vice President Al Gore telephoned officials in Florida and Georgia and told them their states would be declared major disaster areas--even before Hurricane Floyd, which veered away at the last moment, reached them. Gore proudly noted his announcement was "unprecedented."

But disaster relief payments face mounting criticism. Some unlikely bedfellows--environmentalists, consumer activists, and free-market conservatives--argue that the increased disaster spending encourages reckless development in areas prone to severe weather and threatens to replace private insurance markets with a hodgepodge of poorly financed government transfer programs.

Further, they charge, when the residents of these high-risk areas face no economic costs for their unwise actions, development will continue, increasing the likelihood of future disasters.

Each year, disaster relief costs U.S. taxpayers, insurance companies, and victims about $20 billion, a figure that will only increase if development in coastal areas is allowed to continue at its present rate. Currently, one-fourth of the U.S. population lives within 50 miles of a coastline.

Who should pay to clean up after storms in those areas of pricy real estate that are enjoyed only by those who can afford luxurious seaside residences?

Large insurance companies, like Allstate, are understandably concerned by the prospect of even larger payouts stemming from storm damage. They are actively pushing legislation that would require the U.S. Treasury to insure the insurance companies against losses from “natural” disasters.

Such "reinsurance" programs already are in place in certain states. Florida, for example, has for 30 years maintained the Florida Windstorm Underwriting Association (FUWA), which provides coverage that private insurers do not want to handle.

But these programs often find themselves coming up short, as paid premiums increasingly fail to reflect the cost of disaster relief in the real world.

Had Floyd hit Florida, FUWA would not have had sufficient funds to cover the estimated damage. In order to meet its obligations, it would have been forced to borrow and rely on special premium assessments on all insured property, including autos, regardless of where owners lived in the state. Even those who did not own real estate would have had to reach deeper into their pockets. In short, those living inland and normally spared storm damage--and they tend to be less affluent--would be called on to subsidize wealthy residents living in high-risk areas.

Critics of such special assessments call them “Robin Hood in reverse” subsidies. Their defenders say coastal dwellers are worth it, because they create the most wealth and pay the most taxes.

The best way out of this dilemma, says Longman, is to unshackle the private insurance market. Were they to be freed from state regulations governing premium increases, he says, insurance companies would have no problem attracting the necessary capital to cover major losses.

“At the right price, the insurance industry’s access to capital is virtually unlimited," Longman says, noting that Wall Street has developed numerous financial instruments--from "act of God" bonds to derivative products--that allow insurers to spread the risk of catastrophic events to global investors.

"A free market solution to America’s disaster costs would mean much higher premiums for owners of high-risk property,” Longman accedes. “But that would be balanced by lower costs for everyone else and reduced development in disaster-prone areas."