WASHINGTON (Oct. 30, 2012) –-As much of the eastern United States begins the work of assessing the damage caused by Hurricane Sandy –- even as its remnants continue to wallop inland areas with strong winds, heavy rains and blizzard-like conditions –- the R Street Institute today suggested the storm should heighten awareness about the dangers of federal policies that encourage development in risk-prone areas.
Key among these is the National Flood Insurance Program, which is expected to pick up as much as half of the $20 billion in economic losses Sandy is projected to produce. The 44-year-old NFIP is the federal government’s second largest fiscal liability, behind only Social Security, with taxpayers on the hook for the program’s $1.25 trillion of coverage in-force, including $527 billion of coverage in coastal floodplains.
While Congress finally moved earlier this year to pass serious reforms to the program -– including phasing out subsidized rates for second homes, commercial properties and properties that have been subject to repetitive losses -– the NFIP remains roughly $18 billion in debt to the U.S. Treasury.
“It appears likely that Sandy will exhaust the NFIP’s remaining $3 billion of statutory borrowing authority, meaning it will need to request more money from Congress to pay its claims,” said R Street Senior Fellow R.J. Lehmann. “In the short term, we would insist the NFIP use its existing authority to raise rates, buy reinsurance and issue catastrophe bonds, so that the private market, rather than taxpayers, assume the risk of these sorts of catastrophes in the future. Over the longer term, further NFIP reform must include phasing in actuarial rates for all policies, and possibly selling some of the NFIP's 5.6 million policies to private insurers.”
Suffering the most direct impact from Sandy and its tidal surge were New Jersey’s numerous barrier islands. Because most of the state’s barrier beaches were already developed prior to 1982, they largely are exempt from the Coastal Barrier Resources Act. The CBRA, which recently celebrated its 30th anniversary, prohibits federal assistance for roads, wastewater systems, potable water infrastructure and disaster assistance in 3.1 million acres of coastal land and aquatic habitat.
“From 1982 through 2010, the CBRA saved taxpayers at least $1.3 billion by limiting development in high-risk coastal areas,” R Street President Eli Lehrer said. “It has served as a model for a free market approach to environmental challenges. The federal government should not be subsidizing environmentally destructive development or encouraging people to live in harm’s way. The images we've all seen of the coastal barrier destruction caused by Hurricane Sandy make abundantly clear precisely what the law was created to avoid.”
Some lawmakers, including New Jersey’s own Rep. Albio Sires, have proposed even greater federal subsidies to coastal development, by creating a system of government-backed reinsurance and loan guarantees to state-sponsored catastrophe funds and insurers-of-last-resort. This would have the effect of making it easier to develop property in risk-prone areas that private insurers are reluctant to insure, thus making it all but certain that the impact of the next Sandy would be even greater.
“While Sandy was a very large and tragically lethal storm, the global insurance and reinsurance industries are perfectly capable of absorbing the claims this storm will produce,” Lehmann said. “Those states with large residual markets are, uniformly, places where lawmakers and regulators have suppressed risk-based insurance rates. For the federal government to aid states in that kind of suppression would be a disaster for both taxpayers and the environment.”