Federal insurance fail

Federal insurance fail

In my paper on business versus bureaucratic methods of managing water, I mentioned the problem of subsidized government insurance (against floods or crop failure) leading to excess risk taking.

Ric Davidge had such an interesting response to those thoughts that I post it here, in honor of Friday the 13th:

I think this is a solid model, especially for federal exposures. So often it is the first permit/permission by a federal agency that starts a process of risk exposure that may will cause economic harm in addition to ecological harm. And in almost every case the base resource is WATER.

In the early ‘80s, President Reagan and Congress tried to change some of these wrongheaded policies with the enactment and administrative delineation of undeveloped coast barriers along the Atlantic and portions of the Gulf Coasts.

The idea was basically very simple. Do not allow any federal permitting (Army Corps of Engineers, Section 404 permits allowing the development of wetlands, Dept. of Transportation permits allowing roads and bridges, etc) in these areas, as such permitting affected risk choices.

Additionally, Reagan and Congress attempted to end the cycle of risk underwriting by changing federal flood insurance to allow only one recovery. A structure could be insured once in consideration of what was in place — essentially grandfathering them in. Any future risk after that would be on the back of the developer/homeowner and not the federal government.

Federal Flood Insurance is one of the largest “exposures” to the national treasury in existence. A vast unfunded mandate. Unfortunately this proposal failed in Congress due to obvious special interest pressure on key Members of Congress. (NOTE: I was the federal chairman of this initiative and delineation process. Job was done on time and under budget. A rarity in my Wash DC experience.)