The Price of Tides

You love the smell of the sea, the feeling of sand between your toes, the sound of waves rolling in, the sight of pelicans soaring above blue-green water. So you buy a piece of beachfront property and build the house of your dreams, a mere 100 feet from the ocean. Twenty-five years later, due to steady natural erosion and a couple of storms, your house is a bit closer to the ocean than you'd like. In it, in fact.

In a free society, the government allows this sort of thing to happen. But that does not mean that it should encourage such recklessness by promising to pay for the consequences with other people's money.

The federal government has been making that promise since 1968, when Congress established the National Flood Insurance Program, which covers losses from storms, sea-level rise, hurricanes, and erosion. Critics of the program have long argued that it contributes to overdevelopment of coastal land by providing insurance at artificially low rates. In response, the House last year approved, by a vote of 388 to 18, a bill that would restrict federal flood-insurance coverage in areas especially vulnerable to erosion, phasing it out completely for many properties. A similar measure ran into considerable opposition in the Senate this year, and its fate was uncertain in mid-June.

The legislation has provoked a familiar confrontation between environmentalists and property owners. In this case, however, the environmentalists happen to be right.

True, the Coast Alliance, the umbrella group that is pushing the insurance restrictions, is interested in more than cutting government subsidies for construction. Although the legislation focuses on erosion, the alliance's main concern seems to be pollution, which it links to all coastal development.

Still, the environmentalists have a point. The flood-insurance program was designed to remedy a "market failure": Property owners in certain areas found that flood insurance was prohibitively expensive or impossible to obtain. The problem is, that's not a market failure. That's the market working. That's the market saying, "Don't build here! Are you crazy?" Subsidized flood insurance muted that message. So it would not be at all surprising if the program led to construction that otherwise would not have occurred.

Federal flood insurance is quite a bargain. The Federal Emergency Management Agency, which oversees the program, says the average annual premium for relatively new policyholders is about $950 (overall, it's about $250). If premiums were set according to sound actuarial principles, on the other hand, the owner of a house valued at $185,000 (the program's maximum coverage) and located seaward of a 10-year erosion line would pay at least $18,500 a year for flood insurance.

Furthermore, the program allows little rate variation; premiums don't even go up after repeated claims. So federal flood insurance is an especially good deal for people who build in the riskiest areas: Repeat claims, which involve only 2 percent of insured properties, represent nearly a third of total losses.

The program is a hefty, taxpayer-funded bailout waiting to happen. Covering 2 million or so policyholders, it insures about $205 billion in (mostly coastal) property but holds only a few hundred million dollars in premium revenue. FEMA says one bad storm year, which many meteorologists think is long overdue, could generate claims of $4 billion.

So the strongest objection to the proposed flood-insurance reforms is that they leave the program largely intact. This is not the objection raised by the owners of coastal properties, of course. Among other things, they complain that the restrictions on coverage amount to "back-door federal land-use planning."

But the flood-insurance program already amounts to front-door federal land-use planning. Municipalities that participate in the program are required to set rules that restrict all coastal construction, whether or not it's covered by federal insurance. And the law requires federally insured banks and S&Ls to insist that mortgage applicants in those communities buy flood insurance. These restrictions are much more troubling than conditions on coverage. But they are part of a predictable pattern: From the farm program to the National Endowment for the Arts, the government often uses subsidies to justify regulation.

Policyholders also complain that the insurance restrictions would drastically reduce the value of their property. This is unfair, they insist; the government should live up to its obligations. Taken seriously, this argument would mean that the very existence of a government program justifies its continuation.

But if property owners did not have a right to demand that their fellow citizens subsidize their coverage before Congress created federal flood insurance, they do not have such a right now. An expectation is not an entitlement. Those who rely on government promises, like those who build too close to the ocean, should recognize the risk they're taking.