Benevolent Paternalism or "Tough Love"?: Two Approaches for Adapting to Climate Change

One Reply to “Benevolent Paternalism or “Tough Love”?: Two Approaches for Adapting to Climate Change”

Matt, thanks for these thoughts. Your response to this article confuses me, though. The subject of the article is federal flood insurance under the National Flood Insurance Program, not “insurance companies.” Those homeowners’ flood risk is not covered in the private market.

I generally agree with you that insurance premiums should be priced commensurate with risk. But this might lead to abandonment or at least huge property devaluation in some pretty highly populated places. Indeed, that’s why the NFIP was created; private insurers were unable to sell insurance at rates that were actuarially sound and still affordable to homeowners, leading to large-scale withdrawal of insurers from the private market. I expect there would still not be a viable private insurance market in most U.S. coastal areas today except at a cost that would be prohibitive to most current or prospective homeowners in these areas. What would you recommend as a solution?

Also, neither the NFIP nor private insurance typically does a good job of differentiating, property by property, among “precautions” taken by individual homeowners, likely because of the transaction costs involved. The main variability in pricing is location. And the main challenges in many communities such as this one actually public infrastructure failure in the face of sea-level rise and storm surges (both beach protection/nourishment failure and road/utility failure), meaning that individual homeowners’ precautions would not solve this problem in any event. What role do you see for government in protecting or not protecting these communities?

Sean

Comments are closed.

Reader Comments

Sean Hecht says:

July 29, 2013 at 10:58 am

Matt, thanks for these thoughts. Your response to this article confuses me, though. The subject of the article is federal flood insurance under the National Flood Insurance Program, not “insurance companies.” Those homeowners’ flood risk is not covered in the private market.

I generally agree with you that insurance premiums should be priced commensurate with risk. But this might lead to abandonment or at least huge property devaluation in some pretty highly populated places. Indeed, that’s why the NFIP was created; private insurers were unable to sell insurance at rates that were actuarially sound and still affordable to homeowners, leading to large-scale withdrawal of insurers from the private market. I expect there would still not be a viable private insurance market in most U.S. coastal areas today except at a cost that would be prohibitive to most current or prospective homeowners in these areas. What would you recommend as a solution?

Also, neither the NFIP nor private insurance typically does a good job of differentiating, property by property, among “precautions” taken by individual homeowners, likely because of the transaction costs involved. The main variability in pricing is location. And the main challenges in many communities such as this one actually public infrastructure failure in the face of sea-level rise and storm surges (both beach protection/nourishment failure and road/utility failure), meaning that individual homeowners’ precautions would not solve this problem in any event. What role do you see for government in protecting or not protecting these communities?

Sean