- Dec 21, 2005
- Basic Beliefs
Correct, but I think that Fannie Mae and Freddie Mac already tried to provide this kind of economic backstop to 'unviable land' (similar to the NFIP insurance backstop) but were met with less than stellar results. Perhaps not enough intrusion?Close enough. There is no economic incentive for the private market to provide flood insurance because the at risk group is too small and too well defined. Banks require flood insurance before they issue a loan to anyone in the "Hundred Year" flood plain. This greatly increases the premium paying base. Development which increases the rate of runoff has expanded this plain, which has led to more regulation of land use.I don't think that's exactly right. NFIP is a government program that takes the premium and pays the losses. There is still no insurance 'market' for flood except for gaps in what the government doesn't cover. The economic model you are describing is a government subsidy to develop land that would otherwise be too risky to occupy.I am quite familiar with redlining. I have many friends who either pay a large amount for insurance, or sometimes decide they can't afford it at all. Most of these people are middle class whites, but a few of them are considered wealthy. The wealthy are less affected and the insurance allows them to enjoy a high standard of living in a high risk area. I am speaking of flood insurance.
This is a case where the red lines are drawn by the government because left to themselves, insurance companies would not offer flood insurance of any kind. The government regulates the flood insurance market, so that rates are kept artificially low and any single provider is not exposed to excess risk.
The result is an interesting economic model in play. Flood insurance allows land to be developed which otherwise would not be economically viable for housing, due to the risk of losing it all in a given period of time. This development changes the geography enough to increase the risk of previously marginal areas, so overall flood risk increases. Some properties have been declared 50% (and higher) losses 3 or 4 times in the past 40 years.
None of this would have happened if not for government regulation which created a insurance market for high risk properties, by drawing a red line around an area and requiring insurance companies to sell flood insurance to any who can afford it. A home owner is not required to be insured, but no bank will finance an uninsured property, which drastically affects market price.
So, if red lining is a problem, the government has shown it has a remedy. It just depends on who needs to be remediated.
There is still government regulation all over the insurance industry - particularly to personal lines carriers. It's just different than how flood insurance works. And if the current climate change storm trends continue, it will be increasingly difficult to find ANY kind of storm coverage from Oklahoma to Virgina down to the gulf.
Government flood insurance allows people to invest in property which no private insurer would touch, in other words, land that was reclined long before there was such a term.
If it works for geographically unviable land, it would work for the economically unviable land as well.