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The risk of subsidization


No one knows for certain what role, if any, global warming plays in hurricane formation and intensity.

That includes climatologists. Some claim global warming means that we can expect a lot more hurricane seasons like last year's record-breaker; others claim that hurricane frequency and severity reflect a cyclical pattern unrelated to any rise in average temperatures.

The debate can be quite fierce. That makes it all the more noteworthy that a group of 10 nationally recognized climatologists with widely divergent views recently issued a three-paragraph document titled "Statement on the U.S. Hurricane Problem."

According to the climatologists, the problem isn't global warming, either. The document notes the debate over climate change, but says that debate "should in no event detract from the main hurricane problem facing the United States: the overgrowing concentration of population and wealth in vulnerable coastal regions."

Then it places blame--on the government.

"Rapidly escalating hurricane damage in recent decades owes much to government policies that serve to subsidize risk," say the climatologists. "State regulation of insurance is captive to political pressures that hold down premiums in risky coastal areas at the expense of higher premiums in less risky places. Federal flood insurance programs likewise undercharge property owners in vulnerable areas. Federal disaster policies, while providing obvious humanitarian benefits, also serve to promote risky behavior in the long run."

The signatories then "call upon leaders of government and industry to undertake a comprehensive evaluation of building practices, and insurance, land use, and disaster relief policies that currently serve to promote an ever-increasing vulnerability to hurricanes."

In short, the problem is us, as reflected through the actions of our lawmakers and regulators. Nobody wants to pay the real cost of protecting buildings in catastrophe-exposed areas. That's just human nature. The problem comes when human nature confronts Mother Nature in the form of a hurricane.

The real cost keeps going up, too. People like salt water and pleasant temperatures, so they flock to coastal areas. Population density increases, but it's more than head count that matters.

For example, the nature of exposed property is changing as well. Not that long ago, a beach house was just that--a structure nowhere near as expensive as the owner's primary inland residence. Now the once-humble beach house has often been replaced by multimillion-dollar houses. So, how to deal with the problem? You can't unbuild buildings without making the owners of said buildings quite unhappy. You can, however, make existing structures stronger. Insurers and advocacy groups have stressed for years that an investment of a few hundred dollars in things such as brackets to bolster corners or even more screws to hold down roofing can save thousands of dollars.

But that's the easy part. The hard parts are social and political.

The social part--persuading people that coastal areas cannot bear unlimited development--will probably prove to be a hard sell indeed. Once again, we're talking human nature--nobody likes to be told, "You can't do that."

That leaves the political part, and that's the hardest part of all. Government policies helped create the situation by underpricing insurance and subsidizing development where it may not have been wise to build. But changing government policy often borders on the impossible.

Allowing insurance prices to accurately reflect risk in one fell swoop would lead to a voters' revolt. But permitting the market to work is the best way to reduce the hurricane exposure. And reduction is the best that can happen. The exposure can't be eliminated--entire populations aren't going to move 50 or 100 miles inland. In fact, simply holding the line would be a step in the right direction, and possibly the only realistic one.

Rather than artificially depress insurance prices, regulators should let them gradually increase to reflect real risk. "Gradually" is the key word, too--gradual increases could be politically palatable.

Policymakers need to heed the Hippocratic Oath's admonition to do no harm as well. That means avoiding the politically attractive temptation to encourage development--either directly or indirectly--where it shouldn't be. Governments generally try to keep their citizens out of harm's way, not encourage them to seek it out.

The choice is stark--policymakers can take meaningful steps to avoid adding to the hurricane exposure, or wait for nature to take its course. Either way, it's going to cost. The only question is whether we're willing to pay now or, as the climatologists remind us, face the distinct probability of paying much more in the future.