Thank You for your civilized comment.
Have you ever made an insurance claim? With uncovered repairs and depreciation, you will never actually get enough to fix what was damaged. Until they fix this with legislation, I’m glad disaster relief exists.
The pubbie-lovers on my facebook feed are screaming one word about the bill: “Pork!!”
Of course, they can’t identify any actual pork in the bill (they’ve tried, but everything they’ve named had a perfectly rational reason to be there). And absolutely none of them live within 20 miles of any affected areas.
Just wait until the pubbie-lovers have the same thing happen to them; just how fast until they’re screaming for their share of government assistance?
So in a civilized country no one needs to buy flood or homeowners insurance because the government will just bail them out if they don’t have it?
Homeowner’s insurance doesn’t cover floods. No private insurer provides flood insurance. So you remark doesn’t make much sense.
This was simply a slap in the face to the Northeast by the Republicans. They got rolled on this ‘fiscal cliff’ deal, and as usual, instead of admitting they were wrong or learning something from it, they need a scapegoat. Frankly, I think it’s time to end revenue sharing, let the welfare states starve.
The whole point of insurance is to spread the risk among as many people as possible; that seems to be like a government job to me, not a private industry one. Especially since private insurance is notorious for trying to avoid paying. A business model where they make more money the worse they do their job is not something that works well in the private sector; an example of a perverse incentive in action.
As Christie pointed out, the states Sandy hit worst are all “donor states” to the federal government. NJ in particular is often #1 for the state that pays the most in federal taxes in comparison to what it gets back.
New Jersey could probably take care of their own disaster just fine if they weren’t perpetually supporting however many backward, knuckle-dragging red states intent on kicking them for the favor.
How about some of those states start living within their means?
There’s not much private insurance for flooding, but there’s some. And the reason is obvious: adverse selection. The only people who want flood insurance are the people who are very likely to actually need it at some point. It’s a losing business model: no one lower risk to spread the risk over. Flood insurance is not really insurance in that sense. It’s finding a business who will help you out with the question, “Hey, when I inevitably have flood damage–not maybe, but inevitably–how’s about you pay my bills for it?” You can’t effectively insure against a risk when everyone in the group to be insured will at some point be making large claims. You need lots of other insureds who won’t be making claims. And those guys don’t want flood insurance.
Sandy may be an exception, but that’s the argument for people like Ron Paul against relief in most disasters. You want to live on a shore line? You’ve made a conscious decision to assume that risk. The assurance that there will always be a bail-out, funded by those who did not take that risk, produces the very scenario: disaster, rebuild, wait for the next disaster, repeat ad infinitum. Why not? The risk is assumed by someone else. The argument is, let everyone know you will be responsible for the decisions you make, and then adults can decide for themselves. Your shore house gets blown away? Think hard about whether you want to rebuild there.
Just clarifying.
And then you end up with legions of impoverished and homeless people, because there are common natural disasters over most of the surface of the planet. To qualify as “not taking a risk” by your standards we’d have to evacuate the entire East coast - hurricanes; the West coast - earthquakes; evacuate Tornado Alley, and anyplace where there’s forest or grasslands thanks to fire risk. Which leaves what; deserts?
That’s not actually true. You just need to price your premiums such that you take in more than enough money when there aren’t any floods to cover the payouts when there are, plus profit. If you price it right, every last person you cover could make a claim and you still come out ahead.
However, I agree with you about the moral hazards of bailing out disaster victims. Ideally, we could help out the unfortunate on the condition that they not get themselves into that position again. And/or force people who live in bailed out disaster areas to buy accurately priced insurance for the risk, and force the insurers to pay out 100% of the repair costs in order to make sure they price their premiums accurately.
Basically, the risks aren’t accurately built into the price of living in these areas, and when disasters happen, insurers don’t cover 100% of the damages. Fix these incentives, and we won’t have to worry about bailouts or moral hazards.
Certainly you can mitigate the damage from natural disasters. I remember seeing the aftermath of Hurricane Andrew in which older, more poorly built homes were destroyed while those that met the latest standards were left intact. Similarly, there are standards for buildings that can survive an earthquake. On the other hand, the coastline is going to be hit very hard by hurricanes and winter storms. Even if you can build the home strong enough to survive, the land beneath you is going to be eroded by the storms and so the home will be lost. Should be the public be responsible for rebuilding your beachfront cabin?
I don’t remember the details, but in a report on NPR yesterday, specific pork was mentioned, and it wasn’t related to the storm damage. I think one item had to do with a race track in another state, maybe Texas.
Your idea is a fronted policy and it doesn’t work for homeowner’s property policies. If everyone pays enough to pay for everyone having a total loss, how do you spread out the premium? Is it over 5 years, 10, 15, 20? What happens when the losses occur early? What about normal losses like the common house fire or wind damage to property from thunderstorms, let alone hurricanes? If you were going to price this to work over a 10 year period then the owner of a $250,000 home would pay $25,000 a year for coverage every year for ten years (then what is it free). Add in contents coverage, living expenses during reconstruction and profit and the premium could easily hit $325,000 if not $350,000. So that’s $32,500 to $35,000 a year for coverage. At this level it would equal if not exceed the mortgage payment on the home.
The average yearly premium for a policy on a $250,000 house is about $1,200 right now. Insurance works on the large numbers. Everyone pays a little (relatively) and that pays for some minor to moderate losses and a few severe loses. The insurers exclude most major natural disasters in order to make the product affordable. The only way the government could get out of bailing people out is if they mandated that every policy cover flood, earthquake and other natural disasters. Everyone’s premium would go up so we all shared the risk. But that’s exactly what we’re doing now. We’re just all sharing the risk via taxes. I’m not sure which way is better.
I’m not an insurer, so I’m not going to claim expertise. But you’re right mathematically, you spread it out over time, not people.
Say a flood is expected on average every five years. And the cost of repairs per home, on average, is $20,000. So $20,000/5yrs/12months = $333 per month. That’s what everybody pays. Make it $400 to cover expenses and margin.
Sounds like a lot? Good, that’s an accurate price for the risk of living in a flood prone area. Price is a signal that is supposed to contain that information. If it doesn’t, something is wrong.
Don’t be fooled because you can afford the mortgage. People need to assess the true, total cost of living before they make a decision to move somewhere. If people knew ahead of time that their home would cost on average $400 extra per month, we would have a lot fewer victims that need bailing out.
I still support government aid when it is necessary, but we should take steps to price risk correctly into property costs in order to eliminate the need for bailouts in the future. Or at least only rely on the government to replace spoiled food and provide temporary housing. Although to be honest, that should be covered by insurers too.
As far as I can see the assistance isn’t meant to replace insurance, but augment it. If you lost your house and all its contents, or a business you had spent years building up, do you really think you could just put in a claim on your insurance and all would be golden?
Yes, SOME of that money is going to unfortunate homeowners. But as Dewey Finn pointed out via the NYT link he posted, “The proposed $60.4 billion aid bill would cover an assortment of pressing needs. It includes money to help homeowners and small-business owners rebuild from the storm; to repair bridges, tunnels and transportation systems; to reimburse local governments for overtime costs of police, fire and other emergency services; and to replenish shorelines.”
So, lots of infrastructure repair. Just what a civilized country does, or should do, despite the GOPers wanting to drown civilization in a bathtub.
Re flood insurance, I’ve not looked into this but I would be shocked if claims that such insurance is unavailable are true. Among other things, mortgage companies would be taking a huge risk that their collateral would be destroyed.
Even in flood prone areas, very few people have destructive floods every year. Insurance companies would charge extra in areas that are prone to flooding. And insurance companies can and do avoid concentrating too much of their liability in any one area, even in areas which are not particularly risky. (The company that has my homeowners policy does not issue new policies in my hometown, as they already wrote the maximum that they’re willing to write in this area.)
To the extent that it’s about infrastructure repair and the like, it’s not such a pressing issue and moving the vote a bit is no big deal at all. The outrage is about all the people whose lives are destroyed, so you can’t turn around and start talking about infrastructure repair when someone challenges that entitlement.
In addition, infrastructure repair is a state and local issue. Again, the idea that the feds always need to bail everyone out is unfortunate and destructive.
Considering the alternative is having to deal with the resulting homeless people, yes. Or do something to find them a replacement, on or off the beach. “Ignore the problem and hope it goes away” doesn’t work, no matter how much the Right likes the idea.