How FEMA Puts Americans in Harm’s Way…
The US’ Federal Emergency Management Agency, commonly known as FEMA, may seem like both a fundamentally necessary government agency and an example of a benevolent federal government institution: among other things, FEMA provides disaster relief and a flood insurance pool. Upon analysis, however, it becomes apparent FEMA contributes directly and materially to substantial property damage, increasing the magnitude of catastrophes while, much more importantly, leading directly to lost lives.
Areas routinely hit by floods and hurricanes are typically completely unable to purchase from private carriers insurance against property damage from these perils. That makes sense: would you put up your money against exceptionally poor odds not only of seeing a return but of costing you many orders of magitude more? This is the consideration made by insurance companies: the amount of premiums generated will be dwarfed by resulting claims, therefore we refuse to risk our shareholders capital in these areas. This is a good thing, and an example of the market working properly: when insurance is flat out unavailalbe, the market is signalling that there is such great risk that no investor, at any price, is willing to take on that risk. This is an important signal to the market, including consumers, lenders and others: live in these areas at your own peril. The natural consequence of this would be few or no homes built or occupied in severely high risk areas.
With presumably noble intentions, the agency underwrites flood insurance in the most catastrophically high risk parts of the United States. In so doing, FEMA makes it possible for people to place themselves directly in harm’s way – after all, without insurance, lenders wouldn’t lend to home owners or business owners or construction companies, builders wouldn’t build and no one would live in these places (which, not coincidentally, tend to house some of the poorest and least fortunate people), and we wouldn’t have catastrophes like Katrina (Katrina would, of course, still occur, but the resultant damage would at least be an order or two of magnitude less harmful).
It may seem like compassionate policy for the federal government to backstop insurance for people unable to obtain same from the private insurance market. However the actual unintended consequences are lots and lots of dead bodies, destruction and property damage, lives turned upside down and massive economic loss which flat out could not happen without FEMA’s intervention. The availability of flood insurance from FEMA actively encourages people to reside in the worst possible locations, from the perspective of routine disasters.
One important purpose of insurance is to affix a price to risk, and in the case of places like Florida and New Orleans, the market has determined that price to be infinity (or, more precisely, the price is greater than the value of the items insured). FEMA’s position is that the price of the risk is actually very reasonable (as expressed by the premiums they charge). FEMA is demonstrably incorrect, and the existence of its flood insurance program, in actively ignoring the signals from private insurers, leads directly to death and catastrophe.