Our Insurance System Subsidizes Moves to Disaster Zones

Opinion|Why Are We Still Subsidizing People Moving to Disaster Zones?

Fires are still raging across Los Angeles in what is shaping up to be one of the most expensive calamities on American soil, with estimates of the economic damage and losses running as high as $275 billion. Thousands of residents have lost their homes, which are often their most valuable asset.

Yet there are few signs that policymakers and regulators are grappling with the decisions that brought so many people into high- risk areas to begin with. Their refusal to do so sets the stage for an even bigger, and potentially deadlier and even more expensive disaster down the line.

Financial markets, if left to their own devices, would naturally force Americans to confront the ugly realities of our changing climate and deter them from flocking to places where human habitation is increasingly untenable. Unfortunately, this basic system of supply and demand has been stymied by regional and federal policies — policies supported by both Democratic and Republican lawmakers in both blue and red states who buckle under the short-term political pressure to keep home insurance premiums artificially low.

The result is highly unfair and distorts the market. It endangers our economy by sending scarce resources into the path of natural disasters and will likely devastate still more lives.

In theory, insurance prices quantify the risks of living in a certain place. Of course it should be more expensive to insure a home in an area buffeted by disaster. But in practice, states vary widely in their willingness to allow insurance premiums to increase, with some making it far harder than others for insurers to raise prices. California is one of the most resistant, and until recently refused to let insurers raise premiums or reflect climate-catastrophe risks in their pricing.

Insurers doing business in such heavily regulated states, finding themselves unable to raise premiums when needed, wind up shifting some of the costs to homeowners who happen to live in states that are more accommodating to premium increases. That is, in part, how middle-class communities, such as Enid, Okla., can end up subsidizing the owners of million-dollar houses in Malibu. And under our current regulatory regime, that dynamic is only expected to strengthen, as climate losses continue to cut into insurance companies’ bottom line.