How government insurance destroyed New Orleans

Writing from Chicago, Illinois

In the September 3, 2005 New York Times, columnist John Tierney educates us on the difference between private insurance and government insurance. Currently, the flood insurance that’s available through the federal government, because the premiums are so low, doesn’t fully reflect the costs of assuming that risk. And even as cheap as the flood insurance rates are, not many people bought it.

What’s wrong with government insurance that’s priced too low to cover the risks it insures? First, the taxpayers as a whole have to pay to subsidize something that benefits only a few. Second, as Mr. Tierney writes, building strong levees is a long-term project that protects against something that probably won’t happen before the next election — the time horizon of most politicians. “Members of Congress will always have higher priorities than paying for levees in someone else’s state.”

Also, government insurance isn’t subject to the discipline of having to make a profit. Private insurance companies must earn a profit over the long haul, so they will charge rates commensurate with the risk, and they will seek ways to reduce the risk. They might decline to insure property in the riskiest areas, and they will pressure governments to build and maintain the protections that, sadly, we learned failed in New Orleans when levees broke under conditions they should have survived. Private companies have the discipline to do this. Governments don’t.

In his column, Mr. Tierney tells us the history of fire protection in America, and how private fire insurance has worked to ensure the fire safety we have today.

Some may say that the poor of New Orleans couldn’t afford to live where they did if they had to pay flood insurance premiums that were priced properly. That’s something that government can’t cure — except that government will try by spending untold billions. But after New Orleans is rebuilt, it is likely that before too long the same situation will exist as did before Katrina. Do we really expect anything else?

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