Solving Congress’s Samaritan’s Dilemma

The National Flood Insurance Program may be the best realistic policy option.Who should pay for the damages caused by natural disaster? The American ethos has long called on personal responsibility and private charity, rather than broad public aid, to secure people’s welfare. Though public emergency services play a vital role during and immediately after a catastrophe, this ethos looks to private insurance and aid from disaster‐​oriented organizations such as the Red Cross to be the main modes of recovery from a flood or storm, as well as prior care in siting and constructing buildings to blunt the effects of wind and rain.Despite this, the U.S. government has often come to the financial assistance of Americans harmed by mass calamity. Even in the Founders' era, in 1803, Congress enacted a form of disaster relief by suspending for several years the bond payments owed by Portsmouth, N.H. merchants after a fire struck the seaport. (In keeping with the young nation's values, President Thomas Jefferson also anonymously donated $100 — the equivalent of $2,400 today — for humanitarian aid to the city's residents.)The impulse for government-provided disaster assistance is understandable. But public aid crowds out private relief and dampens incentives for private insurance and damage prevention. On the international level, economists Paul Raschky and Manijeh Schwindt of Australia's Monash University tested for this effect using data from 5,089 natural disasters in 81 developing countries over the period 1979–2012. They found that "past foreign aid flows crowd out the recipients' incentives to provide protective measures that decrease the likelihood and the societal impact of a disaster."Policymakers thus face what Nobel economics laureate James M. Buchanan called the Samaritan's dilemma: the choice to either render aid after a catastrophe or else, seemingly heartlessly, withhold aid to incentivize people in calamity-prone areas to purchase disaster insurance, take preemptive private and local public measures to reduce losses, and build robust private charity systems for when catastrophe strikes. To achieve the latter, elected policymakers must effectively "precommit" to not render financial aid, warding against the temptation to be "time inconsistent" and backtrack when the public sees heart-rending images of disaster victims.The National Flood Insurance ProgramCongress created the National Flood Insurance Program (NFIP) in 1968 to escape the Samaritan's dilemma in a politically palatable way. In prior decades, lawmakers had routinely handed out ad hoc aid to flood and storm victims. The NFIP was intended to reduce such aid and protect federal taxpayers while providing prospective flood victims a way to financially protect against loss.The NFIP is a government program, but lawmakers wanted it to charge most insureds roughly "actuarially fair" premiums. Though buildings constructed prior to the legislation would qualify for discounted rates (and thus receive public subsidy), owners of subsequently built structures who purchased coverage would de facto "prepay" the cost of restoring their properties following catastrophe. The program also requires that, for buildings in high-risk areas to qualify for coverage, those areas must be zoned to limit construction and their building codes must include provisions to make new structures better able to withstand floodwaters, e.g., by requiring their main levels to be elevated above typical floodwaters.Except for the "grandfathered" preexisting structures, lawmakers intended for the NFIP to be largely subsidy-free, protecting taxpayers. According to University of Florida law professor Christine A. Klein, Congress expected that the number of grandfathered structures would approach zero after 25 years. And indeed, the percentage of subsidized policies has decreased over time, but now — after more than a half-century of the NFIP — they have not disappeared. And in the past decade, Congress has partly retreated from the commitment to end the subsidies.So, what should be done about flood disaster policy going forward? Though private flood insurance has entered the market in the last few years, there are questions whether it will persist over the long term. And elected policymakers are unlikely to ignore the plight of large groups of people whose homes are struck by floodwaters. Yet, a return to the ad hoc aid of the mid-20th century is undesirable. So, though flawed, the NFIP likely is the best policy response that is politically attainable. That said, the program can be improved, and the most important step Congress can take is to return to the original intention that it charge unsubsidized, actuarially fair rates for covered structures.Pre-NFIP Federal Disaster PolicyBetween 1803 and 1947, Congress enacted at least 128 specific legislative acts offering ad hoc relief after various disasters. But some catastrophes were followed by no federal response. For example, in 1887 President Grover Cleveland vetoed relief for Texas farmers struck by that year's devastating drought.Until the 1960s, federal disaster policy mostly focused on engineering solutions rather than relief. For instance, in 1879 Congress created the Mississippi River Commission to coordinate private levee projects to avoid the problem of one area "solving" its flooding problems by building levees to divert the waters to other areas. But Midwest businessmen lobbied for a sustained federal financial commitment to manage Mississippi floods. Congress authorized a round of flood control spending as part of the Mississippi River Commission's work in 1917 and again six years later, but local funding was still required to cover one-third of the works' costs.The Great Mississippi Flood of 1927, which inundated some 16.5 million acres and killed several hundred people, resulted in permanent federal responsibility for controlling flooding along the river under the Flood Control Act of 1928. That responsibility expanded to the entire country in the Flood Control Act of 1936. This aid was overwhelmingly directed to building flood control projects.This began to change with the Disaster Relief Act of 1950 (now known as the Stafford Act), which assumed federal responsibility for the repair and restoration of local public infrastructure after disasters. Overall, federal responsibility for disaster recovery spending began to grow. From 1955 through the early 1970s, federal disaster relief expenditures increased from 6.2% of total damages after Hurricane Diane in 1955 to 48.3% after Tropical Storm Agnes in 1972.Where was private flood insurance? / In many calamities, private insurance provides relief following a loss: auto insurance covers those harmed in a car crash, and homeowner's insurance covers losses in a housefire or burglary, for instance.At various times in American history, private insurers have offered flood coverage. But the magnitude of losses from major floods frequently pushed those insurers into bankruptcy. Until very recently no reputable insurer had offered flood insurance since the 1927 Great Mississippi Flood. As Wharton School economist Howard Kunreuther et al. explain in a 2019 paper:In 1897, an insurance company offered flood insurance to property along the Mississippi and Missouri Rivers motivated by the extensive flooding of these two rivers in 1895 and 1896. Two floods in 1899 not only caused the insurer to become insolvent since losses were greater than the insurer's premiums and net worth, but the second flood washed the office away. No insurer offered flood coverage again until the 1920s, when thirty fire insurance companies offered coverage and were praised by insurance magazines for placing flood insurance on a sound basis. Yet, following the great Mississippi flood of 1927 and flooding the following year, one insurance magazine wrote: "Losses piled up to a staggering total…. By the end of 1928, every responsible company had discontinued coverage."Can private flood insurance be economically viable? Much scholarly discussion on this question has been vague rather than definitive: "The experience of private capital with flood insurance has been decidedly unhappy," wrote William Hoyt and Walter Langbein in their 1955 book Floods. "From the late 1920s until today, flood insurance has not been considered profitable," noted the Congressional Research Service (CRS) in a 2005 report. Kunreuther et al. quote a commenter in a May 1952 industry publication offering this blunt assessment:Because of the virtual certainty of the loss, its catastrophic nature, and the impossibility of making this line of insurance self-supporting due to the refusal of the public to purchase insurance at rates which would have to be charged to pay annual losses, companies could not prudently engage in this field of underwriting.Government InsuranceWith no private flood insurance available to property owners, Congress in the mid-20th century took on an increasing role in providing disaster relief. But lawmakers realized that they were placing a growing burden on taxpayers.