Disaster Relief Is Not Enough

Every American is distressed by the loss of life and property experienced by Gulf coast residents due to hurricane Katrina. And, we probably all support providing federal aid to these storm victims. However, today, on NPR’s Diane Rehm Show, an audience member, who was a Florida official, phoned to protest the high cost of storm and related insurance and to call for spreading the risk nationally. This opens a number of questions about what our policy ought to be with regard to likely-disaster areas.

First, insurance is almost never issued to protect against a sure thing, not even against death. Insurance premiums are and ought to be proportional to the probability of the occurrence of the covered risk. There are no insurance policies against death at all future times, but only against death during a short period in the immediate future, and life insurance costs increase as the insured ages and death becomes more likely. Hurricane damage is very likely on the Gulf coast, and it is very unlikely in Anchorage, Alaska. Therefore, people who choose to live on the Gulf should pay high hurricane-damage-insurance premiums, and people who choose to live in Anchorage should pay none. Insurance spreads the risk but only in a probability related way.

Second, when we think about people choosing to live at one place or another, we are thinking about a complex matter. People choose to live where homes and employment are available, and they seldom stop to think about long-term hazards. Homes and plants are usually not built by the people who live and work in them. They are built by people who make large investments, earn a profit and are usually gone long before disaster strikes. Despite their interest in current tax receipts and more jobs, it is the responsibility of the states to protect their citizens by forbidding development in certain-disaster areas.

What should our policy be? Some people can afford to move, but some can’t. Some small developments can be abandoned over night, but our investments in places like the city of New Orleans are so large that they can only be abandoned very, very slowly. Certainly, the Federal Government should generally provide disaster relief, but it should also require that the states formulate and execute plans to eliminate disastrous threats to their citizens and, as needed, it should provide support for the execution of these plans.