It’s a central question as sea levels rise, storms become more intense, and coastal property damage skyrockets: Why do people keep rebuilding along the coast?
A recent study led by University of Massachusetts Dartmouth professor Chad McGuire tackled that question statistically. By analyzing more than 57,000 Massachusetts properties insured by the federally backed National Flood Insurance Program (NFIP), McGuire and his colleagues found that wealthy communities, on average, paid less for flood insurance than poorer communities. The findings are counter-intuitive because public policy experts expect more expensive properties to be charged more more for insurance.
So I quizzed McGuire by e-mail to find out more. Here is an edited version of our Q-and-A:
Daley: What are some possible reasons for more expensive properties paying less for flood insurance?
McGuire: The history of the National Flood Insurance Program has a lot to do with it, particularly in older coastal communities like Massachusetts. Because many coastal communities had homes that existed before the NFIP program began, many of those homes have received the most generous subsidies for flood insurance. From an economic perspective, paying less for flood insurance can help increase the value of the home because the costs of insurance are artificially lowered. Since many of these homes were originally built right along the coastline, and because we tend to desire coastal properties, there is generally higher demand for these properties. All of this plays into the home being more expensive, but paying proportionately less for flood insurance.
Daley: What do lower premiums signal to an individual homeowner in harm’s way?
McGuire: Insurance premiums signal risk to the insured. If we engage in risky behaviors, like smoking or getting into car accidents, then our medical and auto insurance premiums are higher. The higher premiums tell us something about the riskiness of our actions. When government subsidizes, or artificially lowers, flood insurance premiums, there is a disconnect between the actual risk and how we perceive that risk. The effect can be people willing to engage in risky behaviors and, in some cases, invest more than they otherwise would in risky areas.
Daley: Who winds up paying for that lower risk?
McGuire: Our current system of public insurance and public disaster relief places a lot of the onus of flood risk on the taxpayer. This is certainly the case when subsidized flood insurance encourages additional coastal development and helps to maintain higher coastal home values. Also, the NFIP itself does not have the ability to pool risk since it generally applies only to flood-prone areas and it has no ability to develop a reserve in years when premiums collected exceed payouts for flood losses. Thus, for these reasons, the U.S. taxpayer is ultimately responsible no matter where they reside across the country.
Daley: What are some solutions?
McGuire: Fundamentally, insurance needs to do its job. The NFIP needs to act like a normal insurance company and work towards developing a system of pooling risk and charging premiums that reflect the actual risks of coastal living. Coastal communities have become reliant on the subsidies allowing inflated home valuations that lead to investments that might not be supported under normal market conditions. Removing subsidies will provide coastal communities a clearer signal of the actual risks posed, allowing behaviors to realign around those actual risks.
Daley: What other research are you doing in this area?
McGuire: I’m very interested in how current public policies affect human behavior, particularly how we perceive risk. I’ve been talking and writing about the relationship between actual and perceived risk for a few years now. But I’m also interested in how coastal communities can move forward in a world where the climate is changing in a way that includes sea level rise. A particular area of interest is the development of land-use strategies that help protect coastal ecosystem values as sea levels rise. The hard part of this work is making land use planning decisions today with a different looking future in mind. The legal and policy implications are substantial, but that just makes the work all the more interesting.