When rebuilding after a flood, it is important to avoid repeating past mistakes. But that is easier said than done, politically as well as psychologically, as the recent news about post-Katrina reconstruction shows. One story described how increasing numbers of homeowners in Louisiana are choosing to not to buy storm damage insurance on their homes because of sharply higher premiums. Another detailed the continued sparring of lawyer Richard Scruggs and state attorneys general with large insurers.
The impulse to rebuild after a disaster is a natural one. But thoughtful caution is needed. Hurricanes will occur again, probably more frequently than in recent decades, either because of a natural cycle or climate change.
Even with better levees, New Orleans is a vulnerable place to have a major city. The loss of protective coastal wetlands is not easy to reverse, yet without them, the probability of great damage from future storms will remain high.
Much past development along the Mississippi Gulf shore – including Scruggs’ house and that of his brother-in-law, Sen. Trent Lott, both within 200 feet of the Gulf of Mexico – was unwise.
It is difficult to balance compassion for those who suffered great losses with the need to learn from experience. But if we subsidize rebuilding in areas where nothing should be built, we are just setting ourselves up for even greater damage down the road.
Home insurance rates have more than doubled in many areas. Rates on much commercial property have increased even more. Those affected curse the insurance companies, but higher rates are an economically healthy measure. It is not good for a society to build a lot of property in areas where it is at high risk of destruction.
Government could limit such construction through land-use regulations, but those are politically difficult, particularly if they are used to prevent rebuilding and reuse of an existing legal property. Higher policy costs that properly reflect higher risk are a market force that accomplishes the same end.
State insurance commissioners and attorneys general in Louisiana and Mississippi are pressing insurance companies not to cancel customers and to limit price increases. This is not new. Florida’s government has long fought to require insurance companies to stay in the state and cross-subsidize rates of customers in hurricane-prone areas with higher rates in safer areas.
This is a classic challenge in insurance. You want to reduce the magnitude of possible loss to individuals without taking away incentives for prudent behavior. That isn’t easy.
Government-subsidized flood insurance has contributed to the problem, encouraging construction and actually increasing the total amount of property damaged. Federal recovery assistance without restrictions on reconstruction has the same effect. Katrina was not the last hurricane that will ever hit the Gulf Coast. We will see more damage in the future.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.