Serious problems in the nation’s flood insurance program have received heavy media coverage over the past three months. But flood insurance, like any insurance that covers a single type of (un)natural disaster, is burdened with inherent contradictions that always threaten to scuttle the system.
The root of the problem is that the only people who buy flood insurance, for example, are those who are likely to be flooded. (It’s as if we had special medical coverage that was only for Tommy John surgery and only for major league pitchers.) Flooding is inevitable, and the risk is increasing thanks to sea-level rise and climatic disruption. So payouts over time are frequent and large. An insurer would have to charge exorbitant premiums to fully cover its losses, so the government has to subsidize premiums to make them affordable. However, making insurance too cheap creates serious blowback, encouraging greater risk-taking by developers and policyholders and making future disaster losses worse.
In our book How the World Breaks, we propose the United States tackle these problems with a nationwide universal insurance program to cover not just floods but all types of geoclimatic disasters.
Private disaster insurance is riddled with sinkholes
The dilemmas of private disaster insurance are illustrated best by the National Flood Insurance Program (NFIP), which is administered by the Federal Emergency Management Agency (FEMA) but carried out by more than eighty private insurance companies. The disastrous 2005 hurricane season submerged NFIP deep in the red, and Congress struggled for years to make the program once again self-sufficient without making premiums unaffordable. Finally, Congress passed the 2012 Biggert-Waters Act, which called for premium subsidies to be phased out year by year until flood-policy holders would eventually be paying the full cost of their risk.
But before those changes could begin taking effect, Superstorm Sandy delivered another wallop to NFIP, and Congress had to appropriate even more funds to keep the program afloat. Then, as Biggert-Waters kicked in and premium subsidies started being cut over the following fifteen months, a deafening outcry from affluent constituents who had properties in high-risk locations became too much for Washington. In March 2014, Congress rolled back its plan to cut subsidies, leaving the program once again exposed to the next big storm.
More recently, Frontline and NPR found that between 2011 and 2014, the private insurance companies providing coverage under NFIP were themselves bleeding the program and its policyholders, extracting an average profit of 30 percent. The New York Attorney General recently released a report accusing the companies of fraud.
Flood insurance isn’t the only hazard zone for customers. For example, the hottest earthquake insurance market in recent years has been the state of Oklahoma, which has been plagued by home-damaging quakes resulting from oil drillers’ injection of wastewater. In 2015, insurance companies were accused of stiffing policyholders, denying more than 90 percent of claims on the grounds that the quakes were human-made and not “acts of God” as specified in the policies. Meanwhile, the oil companies were also refusing to take responsibility, claiming that the earthquakes were “natural disasters.” Homeowners were caught in a Catch-22.
With privately administered disaster insurance and market-based pricing of premiums having largely flopped as a means of protecting homeowners and encouraging disaster prevention, the need for universal, single-payer disaster insurance is more obvious than ever. Responding to disasters as we do now—through a cobbled-together nonsystem of private insurance, public insurance for “uninsurable” risks, reinsurance, presidential and gubernatorial disaster declarations, catastrophe bonds, and charity drives—makes recovery highly inconsistent, with lower-income areas and families often bearing the worst burdens.
Public insurance covering geoclimatic disasters wouldn’t have to carry the burden of turning out profits for investors, and it could spread risks across all types of disasters and an entire population. Furthermore, governments have the unique ability to make insurance universal and compel risk reduction, including the prohibition of development in high-hazard areas.
NFIP’s many problems should not be a reason to reject public insurance; instead, that program’s experience can provide some ideas for improving public disaster protection. It already includes some egalitarian features: a $250,000 payment limit on structural damage (so that it doesn’t subsidize full replacement of the most expensive properties) and $100,000 coverage for personal property that is available to renters.
But NFIP still faces those same two age-old problems: it covers a single class of hazard, and its customer base is made up largely of property owners who are highly likely to suffer damages and file claims. A more comprehensive public insurance program should cover all types of geoclimatic hazards, and it must be universal—so that, as with universal health insurance, risks and premium burdens could be shared broadly enough across regions, demographic groups, and types of hazards. That way, coverage could be made affordable for all.
Covering communities at low risk of disaster would not be as odd as it might seem. The New Zealand government’s Earthquake Commission, for example, provides nationwide coverage for damage from earthquakes, volcanic eruptions, tsunamis, storms, floods, and fire to all of the country’s residential property insurance policyholders; the system is paid for through a surcharge on insurance premiums.
In Spain, all holders of private property insurance policies are required by law to have coverage for “extraordinary risks,” including geoclimatic hazards; the coverage is provided by a state-run agency that’s funded by surcharges on property insurance premiums. France has a similar system.
“Disastercare” for all
Our own public, single-payer disaster insurance program should cover all U.S. homes and include mandatory risk reduction, subsidized premiums for low-income households, and ceilings on payouts. All of those features would help keep the program solvent and premiums affordable.
Having provided for risk-spreading and protection against loss, the government would be in a much stronger position to announce and enforce tougher building standards and prohibit construction in high-risk areas while providing ample authority and funds for preparedness, property buyouts, and relocation. Subsidized premiums and strict payout ceilings for repair and replacement like those in NFIP would make the system more progressive. There should also be separate coverage for personal property, and a three-tier premium structure for homeowners, landlords, and renters.
We emphasize that replacement of Obamacare with universal single-payer health insurance should remain the top priority for progressives; however, national disaster insurance would be logical next step. Yes, we realize that in today’s political climate, a bill calling for either program is sure to trigger a Congressional volcano. But as the numbers of people potentially affected by disasters grows, we can expect a majority emerge in favor of universal insurance.
We outlined this idea to several experts in disaster risk—Leigh Johnson of the University of Zurich; Lisi Krall of SUNY Cortland; and Carolyn Kousky of the nonprofit Resources for the Future—and asked them for feedback. While they agreed with us that it would be necessary to deploy the stick of tougher risk-reduction policies along with the carrot of universal insurance in order to avoid subsidizing risky behavior, they had one major concern. Our plan, they worried, would be confronted with a problem that’s at the heart of all public insurance issues: the highly political process of setting premiums.
A uniform premium paid by all would be welcomed by those who live in hazard-prone conditions, but we agreed with our experts’ feelings that it would be unfair to those living in safer areas. On the other hand, charging premiums that would cover the full risks of individual properties or neighborhoods would be harsh on people who live in potential disaster zones out of necessity rather than choice. For example, a low-lying area prone to flooding may sometimes be the only place where a family can find housing that’s close enough to a workplace and also affordable; others may not be able to bear the cost of moving out of a neighborhood near an oilfield that has started producing earthquakes. As always, lower-income households would be hit especially hard.
In any case, property-by-property or even community-by-community risk adjustment for all types of hazards is difficult or impossible (and very expensive) to achieve or maintain with any precision, and such estimates are easily distorted by political and special-interest pressures. (But in other ways, politics sometimes works. It took strong political pressure for a buyout plan to make it financially possible for groups of Staten Island residents who’d been wiped out by Superstorm Sandy to move out of their badly exposed neighborhoods. That was certainly better than forcing them to stay and pay risk-adjusted premiums.)
We understand the political and economic difficulties involved in setting premiums, but we still believe the universal disaster insurance system we propose can be designed to work. Because the burden of premiums would be shared by all and could therefore be modest, rates could be smoothed out across the entire population. We suggest that disaster premiums be adjusted according to income and property value. Subsidies necessary for low-income households should be paid for with increased revenues from the more progressive system of taxation that we need anyway.
Universal coverage with universally affordable premium rates and a payout ceiling would be a forthright acknowledgment of the reality that disasters and, increasingly, many of the geoclimatic hazards associated with them are produced by societies as a whole. Most Americans are contributing more than their share to geoclimatic disasters across the nation and world (with the more affluent contributing an outsized portion), not only through greenhouse emissions but also through the countless profitable alterations of the Earth’s lands and waters that are setting the stage for fresh disasters.
There are additional reasons for universality. For example, as geoclimatic hazards become more frequent, more destructive, and/or less predictable, it will become harder and harder to say which communities are at high risk of future damage and which are at low risk. Furthermore, all of us, even those who live in relatively “safe” regions, have a stake in helping disaster-struck communities recover and rebuild; we do it already with our tax payments every time there’s a federal disaster declaration. The government, with taxpayer funding, is already the nation’s crucial backstop in times of catastrophe; we just need a more rational backstopping process.
We should have this system in place (to cite just one horrifying prospect) before there is a full rupture of the Cascadia subduction zone in the U.S. Northwest; the resulting quake and tsunami would cause total destruction west of Interstate 5, wreck the homes of a million or more people, and knock out public services and infrastructure for months or years. Given the likelihood of that event—a 10 percent chance sometime in the next fifty years—and of extreme climate catastrophes, it would be folly to continue depending on our current insurance industry and ad hoc federal assistance.
Of course, insurance alone cannot patch over the increasingly diverse array of disasters that big capitalist economies are spinning off, much less halt the global ecological crisis. Other people around the world, from the Philippines to Pakistan to Haiti, remain exposed and vulnerable to geoclimatic hazards, and solutions that work in the rich world may not provide either prevention or adequate response for the world’s impoverished majority, no matter how resilient they are. People in Tacloban City and Port-au-Prince need national and international disaster policies very different from those that might apply in Seattle or Christchurch. We have a proposal for that, too—in Chapter 11 of How the World Breaks.
But if the United States were to follow the lead of New Zealand and other affluent countries to establish comprehensive public disaster insurance and prevention, it could represent a strong first step toward protecting all Americans, without encouraging or subsidizing risky construction or extravagance.