Cheap flood insurance creates moral hazard by encouraging settlement in flood-prone areas
Evidence
(4) Section 10(b) of S. 3137 provides that no insurance or reinsurance should be issued on property duly declared to be in violation of State or local flood zoning laws. At the hearings a number of witnesses, whose principal interest is in flood control rather than flood relief, expressed concern that the ready availability of inexpensive flood insurance might encourage people to settle in areas exposed to flood perils. They felt that Section 10(b) did not adequately meet this danger. To meet this criticism, an amendment has been proposed providing that no insurance or reinsurance should be issued in any geographical location unless an appropriate public body has adopted such flood zoning restrictions, if any, as may be deemed necessary by the Commissioner to reduce, within practicable limits, damages from flood in such locations. — Henry M. Hart, Jr. and Albert M. Sacks, The Legal Process, 1786
Categorization
- DEFINE: Clear statement of the moral-hazard objection to subsidized disaster insurance and of the zoning-condition remedy — usable institutional reference.
- QUESTION: Does subsidized insurance encourage development, or does it just shift where existing development gets insured? The moral-hazard claim interacts with the flood-is-natural point raised elsewhere in this chapter.
- XREF: connects to: Floods are the natural behavior of streams, not abnormal events — Henry M. Hart, Jr. and Albert M. Sacks, The Legal Process: Basic Problems in…, 1803; Flood insurance cannot be actuarially self-supporting because risk is unpredictable — Henry M. Hart, Jr. and Albert M. Sacks, The Legal Process: Basic Problems in…, 1781; Contradictory engineered water management signals the loss of flood equilibrium — Aldo Leopold, A Sand County Almanac: With Other…, 424 (+2 more)
Broader Connections
- Financialized insurance shifted from collective risk spreading to encouraging individual risk endorsement
#expands(0.80) — Aris Komporozos-Athanasiou, Speculative Communities, 274 - Insurance on institutional trustees both creates moral hazard and enables ancillary social control.
#exemplifies(0.75) — Shapiro, Susan P., The Social Control of Impersonal Trust, 107