Friday, November 2, 2012

Hurricanes, Sandy, Federal Flood Insurance and the Environment

The above photo is from a stunning collection of before and after Hurricane Sandy satellite photos, here.  The devastating was indeed enormous and it's been estimated that the cost of Sandy could approach $50-100 billion. The human misery and suffering following Sandy has been intense and prolonged in some areas.  Meanwhile, God, conspiracy and the politics of environmentalism have entered the picture. The religious right is claiming that Sandy was an act of God as punishment because America is a sinful nation.  The conspiracy theorists attribute Sandy to a man made event utilizing HAARP technology, here.   The environmentalists have attributed Sandy to global warming and some even oppose the rebuilding of ravaged areas.  Meanwhile, ordinary Americans yawn and tell themselves that hurricanes really do happen and have always happened as an act of nature.  Of course, they do.

While I don't buy into the global warming globaloney, I do believe that the environmentalists have come closer to getting it right.  Unfortunately, the environmentalists tend to be radical lovers of statism and seek government solutions to every possible problem.  After Sandy, the time has perhaps arrived to bring the issue to the table because storms and hurricanes are exceedingly expensive as well as devastating.

The Decade's Worst Hurricanes Coastal Living
Ike (September 2008) Although it was classified as a category 2 storm, Ike remains the third costliest hurricane in U.S. history after Katrina and 1992’s Andrew. Total damage: $25 billion, mostly in Florida, Texas, Louisiana, and Arkansas.

Katrina (August 2005) This category 3 hurricane is the costliest in U.S. history, with damages estimated at $81 billion. It’s also one of the deadliest, with deaths exceeding 1,800 in Florida, Louisiana, Mississippi, and Alabama. Winds reached a maximum of 175 miles per hour, but most of the storm’s devastation resulted from levy failure in the low-lying city of New Orleans. Even now, six years later, the city is still recovering.

Rita (September 2005) Hitting less than a month after Katrina, this category 3 storm prompted a massive evacuation effort of more than 3 million to prevent the tragedy Katrina effected. Still, Rita managed to cause $10 billion in damage in Arkansas, Florida, Louisiana, Mississippi, and Texas.

Hurricane Wilma (October 2005) Wilma’s arrival in Florida was measured at a category 3 level, with winds reaching speeds of 185 miles per hour. The hurricane caused 5 deaths in the U.S., and more than $20 billion in damages.

Charley (August 2004) At a category 4 classification, Charley was the strongest storm to hit the U.S. since—again—1992’s Andrew, which clocked in at category 5. In Punta Gorda, Florida, where the hurricane made landfall, winds clocked in at 112 miles per hour—before they destroyed the measuring equipment, that is. Damages amounted to $14 billion in Florida, South Carolina, and North Carolina.

Hurricane Ivan (September 2004) Ivan hit the U.S. as a category 3 storm, sweeping through Alabama, Florida, Louisiana, and Texas. Deaths totaled 25 and damages $14.2 billion—$610 million of which were attributed to the value of Alabama’s devastated timber properties.
Clearly, the above storms and hurricanes caused a ton of very expensive damage. Yet, folks still live in areas that are highly susceptible to nasty storms. At below sea level, New Orleans is a virtual swampland and the cost of building and maintaining a complex network of publicly funded levies just to hold back the water is mindboggling as is the high cost of rebuilding properties destroyed by floods and storms. After Katrina, CBS reported, here.
For 300 years, the sea has been closing in on New Orleans. As the coastal erosion continues, it is estimated the city will be off shore in 90 years. Even in good weather, New Orleans is sinking. As the city begins what is likely to be the biggest demolition project in U.S. history, the question is, can we or should we put New Orleans back together again?
It's a valid question.  Why do we continue to dump massive financial resources into areas that are geologically destined to be frequently or permanently swallowed up by the sea and storm surges?  I found my answer in a stunning 2004 disclosure by John Stossel titled Confessions of a Welfare Queen.  Stossel's beach house was swallowed by the sea.
How rich bastards like me rip off the taxpayers for millions of dollars.

If the ocean took my house, Uncle Sam would pay to replace it under the National Flood Insurance Program. Since private insurers weren’t dumb enough to sell cheap insurance to people who built on the edges of oceans or rivers, Congress decided the government should step in and do it. So if the ocean ate what I built, I could rebuild and rebuild again and again -- there was no limit to the number of claims on the same property in the same location -- up to a maximum of $250,000 per house per flood. And you taxpayers would pay for it.


I did have to pay insurance premiums, but they were dirt cheap -- mine never exceeded a few hundred dollars a year.

Why does Uncle Sam offer me cheap insurance? "It saves federal dollars," replied James Lee Witt, head of the Federal Emergency Management Agency (FEMA), when I did a 20/20 report on this boondoggle. "If this insurance wasn’t here," he said, "then people would be building in those areas anyway. Then it would cost the American taxpayers more [in relief funds] if a disaster hit."

That’s government logic: Since we always mindlessly use taxpayer money to bail out every idiot who takes an expensive risk, let’s get some money up front by selling them insurance first.

The insurance, of course, has encouraged more people to build on the edges of rivers and oceans. The National Flood Insurance Program is currently the biggest property insurance writer in the United States, putting taxpayers on the hook for more than $640 billion in property. Subsidized insurance goes to movie stars in Malibu, to rich people in Kennebunkport (where the Bush family has its vacation compound), to rich people in Hyannis (where the Kennedy family has its), and to all sorts of people like me who ought to be paying our own way.
Federal Flood Insurance is a federal entitlement that insures a ton of beach front properties and other properties in flood zones that typically include low lying real estate in areas highly susceptible to floods, storms and hurricanes.  Low cost federal flood insurance only encourages real estate development in environmentally sensitive areas that are prone to storms and flooding.

Then there is the issue of private insurance and/or federal flood insurance and whether or not it is a Constitutional function of the federal government to spend into oblivion to keep a city or geographic area afloat with chronic rebuilding and rehabilitation following a destructive storm in areas that may in fact be geologically doomed to nearly constant flooding and storm surges.

The free market has a built-in conservation mechanism simply because so much of what is built these days is subsidized with tax dollars and public bond proceeds, and certainly would not be financially feasible without government subsidies.  If developers and home builder were not loaded up with subsidies and public bond proceeds, the true cost of economic development in flood plains would definitely act as an economic conservation measure because it would deter development in environmentally sensitive areas.  Government entities are notorious for saddling tax payers with the cost of development bonds for infrastructure like roads and bridges and the Federal government is notorious for its various subsidies, loan guarantees and insurance programs.  If the true economic cost of a project was allowed, costs that would include un-subsidized insurance and construction costs, there would be a whole lot less development.  Folks who constantly complain about suburban sprawl never realize that it is government that mostly funds and subsidizes it.

The Federal Flood Insurance Program and various state insurance schemes to subsidize the wealthy is not only welfare for the wealthy but it’s also responsible for endless development in environmentally sensitive areas that would never have been developed without government subsidies. It’s the government that taxes citizen to subsidize growth that destroys the environment. In a free market system such development would be significantly reduced simply because these projects would not be financially feasible. For starters, insurance costs would be incredibly high and this alone would act as a deterrent as well as a free market approach to conservation. Furthermore, many environmentally sensitive properties would simply be 'free market' uninsurable without massive government subsidies and programs. Few businesses or individuals would risk the massive financial losses of investing resources into uninsurable or prohibitively expensive to insure properties, especially in areas highly susceptible to floods, hurricanes and natural disasters.

Without government directly funding out of control development, free market principles would have left us with a much cleaner and more pristine environment simply because prohibitive cost factors would would negatively impact the financial viability of such projects. If developers had to pay the un-subsidized cost of a project and passed those costs along to consumers along with the true cost to insure such properties, there would be much less development because the final  free market 'true cost' would simply not be affordable to most folks who would seek other lower cost housing alternatives.

Whenever government interferes, taxpayers and the environment get shafted. In 2010, the Washington Times wrote about the Beach House Bailout a bill which was castigated as just another 'welfare for the wealthy' bill. 

The beach-house bailout
Congress will soon consider a $200 billion bailout aimed at protecting waterfront real estate owners in Florida. Introduced by Rep. Ron Klein, Florida Democrat, the Homeowners’ Defense Act, known as the “beach-house bailout,” is nothing more than a targeted TARP-style taxpayer-funded bailout Mr. Klein is using to help his home state. Florida has about 5 percent of the nation’s population but more than 50 percent of its total exposure to hurricanes and “at risk” waterfront properties. When private insurance companies tried to raise premiums on those at-risk homes, the state Legislature intervened and established price controls for the private insurers. However, price controls never work. Once its policy to protect its wealthiest taxpayers failed, the Florida legislature established a “public option” for property insurance - a government agency, the Florida Citizens Property Insurance Corp. (FCPIC) - to assess property....

Rather than charge realistic, actuarially sound rates based on comprehensive risk models and expert analysis, Florida has artificially lowered catastrophic insurance rates to provide Floridians with a fail-safe system - the FCPIC. With the state charging irresponsibly low rates, these policies are keeping the private sector from engaging in market-based competition.

The FCPIC currently has a potential liability of $28 billion but only enough assets to cover $4.5 billion, leaving it 84 percent underfunded. Not only are these funds financed by artificially low rates, but a study from Florida State University has found that policyholders with high-risk properties on the coast are paying comparatively less than their low-risk inland counterparts.

To alleviate this problem, Florida’s Legislature decided to sell $28 billion in bonds, more than double the amount of bonds ever sold by a state, to help FCPIC cover its potential liability if a storm were to wipe out its beach-front homeowners. The result is an underfunded state-run insurance program that, without a government bailout, will force Florida into bankruptcy after its first major storm.... Only Florida and California would benefit from the taxpayer-funded bailout - but this benefit comes at the expense of every single taxpayer across the country... Additionally, there are no income-level or home- or property-value restrictions on who benefits from this beach-house bailout. In fact, the Florida system provides massive subsidies to homeowners of $2-million-plus properties. The claim that this bill will help low-income families is so egregious that state Sen. Al Lawson of Tallahassee said, “You’re robbing from the poor to take care of the rich … to subsidize these million-dollar homes built on the coast.”

Taxpayers are not the only ones opposing this most recent bailout. Environmental organizations such as the National Wildlife Federation and the League of Conservation Voters oppose this bill as it sends mixed market signals to developers.

Mr. Klein’s beach-house bailout will not only continue to promulgate irresponsible and unsustainable policy, but will cost American taxpayers billions of dollars to bail out wealthy coastal property owners in the congressman’s home state.
The above 'welfare for the wealthy' beach house bailout bill did manage to pass out of the House Financial Services Committee in May, 2010, here, but appears to have thankfully died.  I couldn't find any documentation that it passed but such bills frequently get new names, new bill numbers and sail through Congress. Nevertheless, the bottom line is that a whole lot of bailout bucks go to very wealthy folks because they have the money to lobby, to fill campaign coffers and bribe congress critters.

When we think of welfare, we almost always narrowly focus on it in the context of the poor folks, not rich welfare queens. But powerful special interests have virtually unlimited money to buy all the taxpayer subsidized welfare perks they can dream of; all they have do is make a campaign contribution.

Let's get back to NY and Sandy.  Interestingly, the WSJ did a piece on NY flood insurance dated August 29, 2012.

Flood Insurance Hits a Bigger Swath WSJ
New York area residents applying for mortgages to buy a new home or refinance an existing one are bumping up against a new obstacle: flood insurance.

Ever since the Federal Emergency Management Agency began redrawing the flood-zone maps in the greater New York region in 2007, some areas that were once considered low-risk have become high-risk. That has prompted banks and other lenders to require borrowers in the high-risk zones to buy insurance against hurricane or flood damage to their homes.

Initially, the new requirements mainly affected owners of single-family homes near coastal areas, including houses in Queens, Staten Island, Long Island and Westchester County.

But as FEMA continues to revise the flood-zone map, the changes are affecting more high-rise residential buildings in Manhattan, Jersey City and elsewhere around the region. The result is that some buyers and owners of condominiums and co-ops are finding that lenders are requiring that they, too, have individual flood-insurance policies or that their buildings buy heftier policies before obtaining a mortgage.

Renee Slas said she was "shocked and appalled" that Bank of America Corp. wouldn't fund her home loan when she attempted to buy her TriBeCa apartment earlier this summer. The rejection surprised her, both because her apartment was on the fifth floor, which seemed an unlikely location for flood damage, and because the building was already insured for natural hazards by Lloyd's of London.

But Ms. Slas says her lender would only consider a policy written by the National Flood Insurance Program administered by FEMA....

Not surprisingly, the new designations of high-risk flood areas aren't sitting well with some residents, especially those who live high in the sky.
Some folks are complaining that the government is forcing them to buy high cost flood insurance that they don't want to buy.  As a matter of fact, FEMA, who runs the federal flood insurance program or NFIP, is broke and has been broke for years.  In 2005, USA Today reported on how broke the NFIP really is.

FEMA halts flood insurance payments US Today, 2005
A government agency has run out of funds to cover flood insurance claims and, in an unprecedented move, has stopped payments to policyholders.

The Federal Emergency Management Agency, which runs the national flood insurance program, has advised the 96 insurance companies that sell flood policies to stop payments to policyholders until Congress says the agency can borrow more money.

It's the first time since the flood insurance program began in 1968 that FEMA has taken this action. The move likely means that thousands of policyholders, who have waited weeks for funds to rebuild after Hurricanes Katrina, Rita and Wilma, are seeing further delays....

Congress is considering bills to increase the program's borrowing authority and could act in the next few days. The full House approved one bill Wednesday giving FEMA authority to borrow up to $8.5 billion from the Treasury. It now goes to the Senate, which is working on its own bill.
Simply put, FEMA doesn't collect enough in NFIP insurance premiums to ever cover the cost of claims.  Meanwhile, Congress just keeps appropriating more and more money to FEMA as the hurricane disasters pile up.  But it gets worse.

Few in the Northeast have federal flood insurance Sun 
Insurance experts estimate that only 15 to 25 percent of at-risk properties in the Northeast U.S. are covered for flood damage provided by the National Flood Insurance Program.

Hurricane Sandy caught many northeastern property owners unprepared, just as Hurricane Katrina's storm surge left many Gulf Coast residents without protection in August 2005.

Only 38,785 residential and business policies were in force in New York City as of Aug. 31, NFIP statistics show. Only 8,129 Atlantic City, N.J., households or businesses had federal flood coverage.

Still, the NFIP could be forced to borrow money to pay claims. The Federal Emergency Management Agency, which oversees the NFIP, confirmed that the insurance program has only about $4 billion in cash and borrowing authority.

Part of the problem is that NFIP rates do not adequately reflect the risk....
We've got a financial disaster.  Folks object to paying for flood insurance because the cost keeps rising yet they expect somebody to pay.  Meanwhile, FEMA and the federal flood insurance program is broke and relies on congressional funding through appropriations.  The Federal government is broke and relies on the Treasury who goes to the Federal Reserve to print more money.  That's hardly a solution.

Let's move to Staten Island, an island that was especially drenched with Sandy flooding and also mentioned in the above reference WSJ article.

‘We Need Food, We Need Clothing’: Staten Island Residents Plead for Help 3 Days After Sandy ABC News

The residents of Staten Island are pleading for help from elected officials, begging for gasoline, food and clothing three days after Sandy slammed the New York City borough.

“We’re going to die! We’re going to freeze! We got 90-year-old people!” Donna Solli told visiting officials. “You don’t understand. You gotta get your trucks down here on the corner now. It’s been three days!”

Staten Island was one of the hardest-hit communities in New York City. More than 80,000 residents are still without power. Many are homeless, and at least 19 people died on Staten Island because of the storm.....

Staten Island officials sounded increasingly desperate today, asking when supplies will arrive. They blasted the Red Cross for not being there when it counted.
“This is America, not a third world nation. We need food, we need clothing,” Staten Island Borough President Jim Molinaro said today.
Staten Island is one horrific tragedy. 469,000 people live on Staten Island which is the least populated of New York's five boroughs. Exactly how many of those Staten Island folks are in real trouble is not clear but what is clear is that the Staten Island is a disaster.

If the environmentalists truly wanted a more pristine environment, less folks living in high risk areas, less human misery from storms and a more cost effective solution to the monstrous cost of storm damage, their best bet is to endorse the free market approach, abolish all subsidies to developers and end government subsidized insurance programs.

Private insurance costs, prohibitive as it might be, would indeed be quite an incentive to get folks out of high risk areas where they'd be much safer and a whole lot less susceptible to the misery storm damage and flooded towns.  Privatized real estate development costs would most assuredly function as price deterrent to massive real estate and economic growth in environmentally sensitive areas.

I grew up in Delaware and spent a ton of time at Delaware, New Jersey and Maryland beaches.  Decades ago, the beach towns were mostly tiny little seashore hamlets that exploded with beach lovers during the summer months.  Now these places are unrecognizable because they've grown into monster high rise urbanized areas. Government subsidies and cheap taxpayer funded insurance made it all possible. When storms hit the beaches decades ago, the damage wasn't nearly as pervasive and costly as it is today because there wasn't nearly as much there.

Environmentalists tend to believe that people are the culprit when it comes to environmental devastation.  The real truth is that government at all levels is directly responsible for most environmental damage because government encourages environmental degradation by subsidizing it.

Free market environmentalism simply makes a whole lot more sense. It's a much better deal for the environmental and the taxpayers - a real win-win.


  1. Excellent information provide for us about the Federal Flood Insurance and the Environment.......
    Thanks for sharing
    Insurance Experts

  2. Thanks for sharing this informative post. insurance is very important for everyone and keep sharing such knowledgeable post.

  3. Very information post, thanks for this.

  4. We were hit very hard by the hurricane that year. A lot has had to change in the home insurance and flood insurance world since then. My company provides flood and home insurance in Melrose MA and the surrounding communities in Greater Boston. If anybody has any questions about how your areas has been affected please don't hesitate to reach out.

    - Sasha


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