Taxpayer Protection Act rewards risky behavior

Published November 22, 2012

Congress is considering another federal government intervention in the market for homeowners’ insurance — on top of federal and state-level programs that already are causing problems. Reform is needed, but the most prominent plan under consideration goes in exactly the wrong direction.
The laughably titled Taxpayer Protection Act, introduced by Rep. Albio Sires, New Jersey Democrat, has the backing of various real estate and construction-related industry organizations, among others.
Mr. Sires introduced his bill before Superstorm Sandy struck New Jersey, New York and other Eastern Seaboard states. The storm is estimated to have caused about $20 billion in damage, with $7 billion of it covered by private insurance. He already had a desire to saddle insurance buyers — and taxpayers — across the country with the costs of natural disasters that occur in specific areas.
The bill would create a federal system of government-backed reinsurance and loan guarantees to state-sponsored catastrophe funds and insurers-of-last-resort, such as the woefully mismanaged Citizens Property Insurance Corp. in Florida or the Texas Windstorm Insurance Association. It’s really a bailout fund for these and other states that run their own property insurance programs.
The system would artificially hold down insurance premiums in California, Florida, Texas and other states with significant catastrophe exposure, particularly on the coasts where the risks are greatest. It’s another try at what analysts call a “beach-house bailout.”
The bill is a typical government response: It sees only the big picture and fails to understand that society is made up of individuals. There is a real sense, after all, that there is no such thing as a market or economy.
People going about their lives, acting or not acting as they see fit, comprise “the market.” They are “the economy.” Markets and economies are intellectual constructs. Ask what the market might do or what the economy might do, and you’re really asking what people might do.
So what might people do if the government shifts the risks of some people’s decisions onto others?
History tells us people whose risks are lessened will take more risks. What is the sense in reducing the costs of insurance to make building in high-risk hurricane-, flood- or earthquake-prone areas easier to do? How can anyone believe it is proper to force a family in, say, North Dakota to pay an insurance premium for a hurricane risk that does not exist in North Dakota?
If someone else covers the costs of the risks they take, people will take more risks. This means more construction in risky areas, more building in environmentally sensitive places, and more damage when the next natural disaster hits.
What we really need is higher insurance premiums for those who choose to build in risky areas. Allowing insurance premiums to reflect higher risks will discourage people from settling in high-risk areas.
We already have a vivid example of the failure of government-subsidized insurance — the federal government’s National Flood Insurance Program, which charges policyholders less than actuaries say is needed to cover flood risks. The program owes the Treasury Department $18 billion for loans that have been necessary to keep the program afloat, and now it will have to pay billions of dollars more — money it does not have — to owners of properties damaged by Superstorm Sandy.
Expect more money from the Treasury — that is, from taxpayers across the country — to cover the losses.
If the owners of property in areas known to be at risk for hurricane and flood damage had been charged insurance premiums commensurate with the risk, there would have been less property development, disruption of lives and damage.
Steve Stanek is a research fellow at the Heartland Institute.