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Lunacy of FEMA Hurricane Insurance Subsidy

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floodinsurance.jpg

Lunacy of FEMA Hurricane Insurance Subsidy

One of the most ludicrous fantasies of the self-indulgent is that a property owner has an entitlement of subsidized government flood insurance. The inherent risk of building along the ocean shoreline is self-evident. The benefits that enhance the pleasure of proximity to the seaside seem unending. However, when the forces of nature thrust her fury and a wall of water inundates pristine dwellings, the first question asked after the storm usually involves rebuilding. The cost of repairs and renovated construction, once paid by private insurance, now normally requires a federal guaranty.

James Bovard made some salient points just after Katrina in Uncle Sam’s Flood Machine.

"The National Flood Insurance Program (NFIP) is the Federal Emergency Management Agency’s crown jewel. Unfortunately, the heavily subsidized insurance bribes people to scorn common sense, damages the environment, and creates staggering liabilities for taxpayers. Federal flood insurance illustrates how selling at a loss can be politically profitable.

The primary effect of federal flood insurance is that far more property is now damaged by floods than would have occurred if the insurance had not made it possible to build in flood-prone areas. The Long Island Regional Planning Board in 1989 complained that federal flood insurance "in effect encourages a cycle of repeated flood losses and policy claims." And, especially in places like Long Island, the program underwrites the vacation homes of the wealthy."

Now that Sandy made her presence known, many of those aforementioned Long Island properties were washed into the sea. Would anyone believe that federal guarantees have any premium correlation to the actual costs of such disasters? The current disconnect between subsidized costs for NFIP flood insurance and the enormous expense for reconstruction is beyond imagination.

The libertarian and media celeb, John Stossel relates his personal experience in Taxpayers Get Soaked by Government's Flood Insurance. One factor in building his beachfront property on Long Island was that government insurance provided the guarantee necessary to qualify for a mortgage.

"Should a big storm wipe out half the coast, you'll cover our losses — up to a quarter-million dollars. Thanks — we appreciate it — but what a dumb policy.

The insurance premiums were a bargain. The most I ever paid was a few hundred dollars. Federal actuaries say if the insurance were realistically priced, it would cost thousands of dollars. Why should the government guarantee water's-edge insurance? Why should the government be in this business at all?"

Mr. Stossel has the knack for boiling down the complex into the common dominator. If private underwriting is not willing to cover the obligation of the risk, at a NFIP discount premium, maybe the insurance is too cheap. The Century Housing organization in Should Taxpayers Subsidize Property Owners in Flood Areas?, states: "Private insurance companies provide almost no flood insurance, because the insurance industry recognizes the huge risks."

Their conclusion is,

"The bottom line is that the taxpayers subsidize the development of property located in known floodplains. And that raises the question of whether that subsidy is good public policy, or whether the whole approach to flood emergencies should be changed. Would we all be better off if we ended the NFIP and instead provided short-term subsidies to floodplain property owners to move out of the danger zone, avoiding the inevitable loss of property and lives that occur so predictably along the nation’s waterways?

At the very least, it seems that FEMA should end subsidizing the NFIP premiums for any insured property owners. And it may be a good idea for the states (which control land use) to prohibit construction within floodplains, or require any owner of property located in a floodplain to carry insurance to reimburse public agencies for emergency services when floods do occur."

The political attraction to continue cheap government waterfront insurance has property owners flocking to buy up and build their dream house. This is probably the costliest boondoggle that benefits the upper middle class and the affluent. Human nature, being what it is, even the purest, as John Stossel, knows a good deal when it is dangled in his face by a seductive government.

So what is the alternative, only high-rise condominiums with expensive maintenance fees owned by offshore tax dodgers? Let us hope that the cherished tradition of individual property ownership is the standard that is protected by all government jurisdictions. However, perpetuating the incentive to willingly build in harm’s way, where personal financial risk is substituted by government guarantees that reward imprudent decisions, needs to change.

The rush to federalize disaster aid and transfer funds back into state coffers is symbolic of the obscene distortion within national taxation. As long as individual states must balance their yearly budgets and the federal government persists with unfunded deficits, individual states will gladly take the bribes and handouts.

Disasters are part of life. There is no warranted absolution from calamites. Insurance that is fairly priced, and rigidly administrated is a system that has provided relief from great suffering and pain. Nevertheless, the business of insurance should be a private contract among willing participants.

If the cost to insure is too high, just maybe the economics of ownership is too steep to continue to support the lifestyle.

The collectivist proponents of big government continue to spread their confusion and prevarications. The Hill reports in Democratic leaders say FEMA has enough cash for Sandy recovery.

"FEMA’s coffers are nearly full because the storm struck at the beginning of the fiscal year, which started Oct. 1.

On top of more than $1 billion left over in the Disaster Relief Fund from last year, Congress has appropriated $7.1 billion for fiscal 2013. President Obama’s decision to make disaster declarations in New York and New Jersey — in addition to emergency declarations in eight other states and the District of Columbia — allows local officials to access those funds immediately."

Disaster relief can be compassionate and supportive. Even so, the practice of subsidized federal flood insurance only encourages the extent and degree of future disasters. Lacking common sense is a national condition. Building on high ground is the prudent course for action.

James Hall – November 7, 2012

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