The 2005 hurricanes illustrated how many Americans are uninsured and underinsured for natural catastrophes and the federal government’s role in recovery from natural catastrophes. An analysis by HUD found that of the 192,820 owner-occupied homes with major or severe damage from Hurricanes Katrina, Rita, and Wilma, approximately 78,000, or about 41 percent, did not have any insurance or did not have enough insurance to cover the damage incurred. Homeowners do not purchase natural catastrophe insurance for a variety of reasons, including financial reasons. Moreover, buying a natural catastrophe insurance policy does not guarantee complete coverage for a dwelling. For example, if the home’s replacement value is calculated inaccurately, the homeowner will buy too little insurance to cover all of the damage. More and more frequently, responsibility for supporting the needs of individuals who lack adequate insurance against natural catastrophe risk is falling to the federal government. We estimate that the federal government made approximately $26 billion available for homeowners and renters who lacked adequate insurance in response to the 2005 hurricanes.
11/07 GAO Report on Natural Disasters GAO-08-7 (p 25) (citations omitted and emphasis added).
Two points. First, I am not sure how the GAO came up with the estimates of $26 billion for 78,000 underinsured and non-insured homeowners and renters. However, I am sure that it can withstand some scrutiny. So, based on these numbers the total per person payout was $333K to those with under insurance or no insurance. To provide some comparison figures, the median home in New Orleans was worth 159.2 K and 130.5 in Mobile, AL in 2005 (from Nat'l Assn of Realtors (R)). Admittedly, beach houses are more expensive than in-town houses, but they are also likely to be insured. Further, they are also more likely to be flooded by a storm surge, but the max payout from Federal Flood insurance program is $250K. Finally, insurers will often pay for living expenses and the like if a home is no longer livable. However, the given these numbers the Feds appear to pay well.
Second, if you, an average homeowner, knew that if there was a big disaster in your neck of the woods, the Feds would pay you $300K, would it have an effect on how you perceived the necessity for purchasing insurance? Would you be less concerned about keeping your coverage limits consistent with the value of your property? If you rented would you even buy insurance? It's human nature to behave this way and economists have a term for it: moral hazard. Moral hazard causes people to act less safe or take on more risk when they feel protected. This increased risk puts the costs of payment to either insurers or, in this case, the government. Thus, big payouts today mean bigger payouts tomorrow.
We want to help out people who are victims of disaster. Its also our nature as Americans. However, do we want to encourage bigger disaster bills in the future? A little tough love might go along way in reducing the future costs of disasters.
Here's what President Coolidge said after the Great Mississippi River Flood of 1927 (apparently in his State of the Union Address),
The Government is not the insurer of its citizens against the hazards of the elements. We shall always have flood and drought, heat and cold, earthquake and wind, lightning and tidal wave, which are all too constant in their afflictions. The Government does not undertake to reimburse citizens for loss and damage incurred under such circumstances. It is chargeable, however, with the rebuilding of public works and the humanitarian duty of relieving its citizens of distress.”
President Calvin Coolidge, “President’s Annual Message,” as reprinted in 69 Congressional Record 107 (1927) cited in a CRS study on the 1927 flood.
As a society, we no longer act as if we believe old dour Cal's values. If the President isn't there the minute after the winds reside with the debit cards, he (or she) just doesn't care or, in the alternative, he (or she) is incompetent. It is ironic that private insurance markets were not as well developed in '27 and the federal government stayed out of the the reimbursement business, when one might reasonably argue that it may have had had a greater role than today in post-disaster assistance. Now, with much more developed private insurance markets, we see an even more important role being taken by the Feds. This seems backwards and, as a result, the government's Good Samaritan specter will have a negative long-run effect on both private insurance markets and the Treasury.
