Reminder From Harvey: Our Brains Aren’t Wired to Buy Enough Insurance
The people in Houston who are really kicking themselves right now are the ones who let their flood insurance lapse. The Associated Press reported that Houston’s Harris County had 25,000 fewer flood-insurance policies in force when Harvey hit than it did five years earlier.
You can imagine what was going through those people’s minds. Flood policies from the federal government cost $700 a year on average, depending on where you live. Every year you pay the premium and don’t get flooded feels like $700 down the drain. Money’s tight, and the chance you’ll be able to cash in with a claim seems small. It’s awfully tempting to ignore those renewal notices. So you let your policy lapse, or you never buy one in the first place—and then, wham: Harvey.
It turns out that lots of types of insurance are like flood insurance. People don’t buy enough coverage unless they’re required to. Car insurance, for example: Liability coverage for drivers is mandatory in every state except New Hampshire, Virginia, and Arizona, according to this article in thebalance.com, a financial empowerment website. The reason is obvious. The government doesn’t want drivers to be able to hurt someone in an accident and then get away without compensating the injured party because they have no income or assets to seize. Carrying liability insurance is like pre-paying for an accident.
Banks won’t give you a mortgage if you don’t carry fire insurance, because they understandably want protection for their collateral. Flood insurance is that way, too. As the Federal Emergency Management Agency says, “Congress has mandated federally regulated or insured lenders to require flood insurance on mortgaged properties that are located in areas at high risk of flooding.” And even if you’re not in one of those areas, your mortgage lender may require you to have a flood policy.
The more you think about it, the more you realize that voluntary coverage is more the exception than the rule. There’s even mandatory insurance for getting old. Never heard of it? It’s called Social Security. The biggest part of Social Security is the Old-Age and Survivors Trust Fund. Congress created it in the 1930s, when it became clear that people weren’t setting aside enough money on their own to cover expenses in old age.
The coverage mandate in Obamacare doesn’t look so odd or onerous when you realize how many other forms of insurance are mandatory. The justification for it is the same, too. The government has a right—in fact, a duty to taxpayers—to insist that people take care of themselves by carrying adequate insurance, rather than throwing themselves on the mercy of the government when something goes wrong.
Conservatives used to get this. The health-insurance coverage mandate in Obamacare goes back to a 1989 monograph from the right-of-center Heritage Foundation, which wrote, sensibly enough: "This requirement would imply a compact between the U.S. government and its citizens: in return for the government's accepting an obligation to devise a market-based system guaranteeing access to care and protecting all families from financial distress due to the cost of an illness, each individual must agree to obtain a minimum level of protection."
In other words, Americans have each other’s backs. We won’t deny people medical care because they can’t pay for it. In exchange, though, we expect people to carry insurance.
Coming back to flood insurance, the problem is not that there’s a mandate but that the mandate isn’t broad enough. Plus, premiums are too low, which is why the National Flood Insurance Program keeps losing money, as the Congressional Budget Office stated again on Sept. 1. Higher premiums and a broader mandate wouldn’t just benefit taxpayers. They would send a price signal to homeowners: If you want to live here, go ahead, but you could save yourself a lot of money by moving to higher ground. That would promote more sensible development. As one person said in the article that Christopher Flavelle and I wrote in this week’s issue of Bloomberg Businessweek, “We can’t prevent the event, but we can mitigate the damage.”
Representative Jeb Hensarling, the conservative Republican Texan, made pretty much this point on Sept. 5 in a press release that probably didn’t endear him to some fellow Texans. The statement from the House Financial Services Committee chairman cited a home in Houston that flooded 16 times over 18 years. (The homeowner had received payments equal to seven times the house’s value.) Hensarling’s bill would provide more than $1 billion to help homeowners reduce their risk of flood damage while “phasing out taxpayer-provided subsidies for properties that flood over and over again.”
It’s uncomfortable to talk about mandates and the like when the people along the Gulf Coast have lost so much. The priority right now is for the rest of the country to open its wallet and help families that have lost everything. But as the request for federal aid mounts—Texas Governor Greg Abbott threw out numbers in the range of $150 billion to $180 billion on Sunday—people are going to ask what can be done to make sure this doesn’t keep happening. Mandatory insurance that’s correctly priced and applies to a broader set of properties would be a big step in the right direction.