Friday, November 9, 2012

Future Storms Like Superstorm Sandy Could Bankrupt States

Superstorm Sandy killed over 70 people in the U.S., knocked out power for millions up and down the East Coast, flooded the New York Subway, and damaged thousands of homes. The final price tag for the storm's damage could exceed $40 billion, which would make it the most expensive storm to hit the U.S. since Hurricane Katrina.
Coming as it did, only a year after Hurricane Irene and eight years after Hurricane Ivan, some are asking whether it is part of a trend towards more damaging storms. The answer is yes—we humans are to blame for more damaging storms, but not for the reasons you might think. One of the main culprits is government intervention in insurance markets, which creates perverse incentives to build in danger zones, thereby increasing the threat posed by storms both to property owners and to taxpayers. If Sandy had hit Florida the way it hit New York and New Jersey, it might have bankrupted the state. To reduce the scale of future damage from storms like Sandy, and the threat of fiscal implosion, federal and state governments should get out of the insurance business.
There have been superstorms similar to Sandy in the past, including the blizzard of 1978, the Perfect Storm of 1991, and the Eastcoaster of 1996. But there doesn’t seem to be a trend in the number or intensity of either hurricanes or Sandy-like superstorms. Martin Hoerling, a meteorologist at the National Oceanic and Atmospheric Administration, says there is no trend in the number of hurricanes or extratropical cyclones. Nor is there any evidence of a relationship between the numbers of either type of cyclone and climate change. However, there has been a significant increase in the amount of damage caused by hurricanes and similar extreme weather events over the past 50 years. There are two main reasons for this. First, we have become much wealthier: inflation adjusted average per capita income in the U.S. rose threefold, from $13,250 in 1960 to $39,800 in 2008. Second, the number of people living along the coast has increased dramatically: from 1960 to 2008 coastal population rose by 84 percent, whereas the non-coastal population rose by 64 percent. As a result, there is simply more valuable property in coastal areas that is likely to be affected when a big storm hits.
One reason coastal population rose more than non-coastal population is that government disaster insurance programs have actively encouraged people to locate close to the coast. In addition to the National Flood Insurance Program, the federal government’s second largest fiscal liability next to Social Security, many states run property insurance plans out of the residual market intended to provide a lower cost of insurance for owners of homes and businesses in more risky areas, which would normally be difficult or impossible to obtain in the private market. Such state-run insurance plans are offered through Fair Access to Insurance Requirements (FAIR) plans, Beach and Windstorm plans, or in Florida and Louisiana, state-run insurers of “last resort.”

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