The Perverse Effects of Subsidized Weather Insurance

Omri Ben-Shahar & Kyle D. Logue, "The Perverse Effects of Subsidized Weather Insurance," 68 Stanford Law Review 571 (2016).

Abstract. This Article explores the role of insurance as a substitute for direct regulation of risks posed by severe weather. In pricing the risk of human activity along the predicted path of storms, insurance can provide incentives for efficient location decisions as well as for cost-justified mitigation efforts in building construction and infrastructure. Currently, however, much insurance for severe-weather risks is provided and heavily subsidized by the government. This Article demonstrates two primary distortions arising from the government's dominance in these insurance markets. First, existing government subsidies are allocated differentially across households, resulting in a significant regressive redistribution favoring affluent homeowners in coastal communities. This Article provides some empirical measures of this effect. Second, existing government subsidies induce excessive development (and redevelopment) of storm-stricken and erosion-prone areas. While political efforts to scale back the insurance subsidies have so far failed, this Article contributes to a reevaluation of the social regulation of weather risk by exposing the unintended costs of government-subsidized insurance.