Disasters and Decentralisation

Abstract

Climate change may potentially increase the magnitude of losses from natural hazards, but the United States experience shows that the primary reason for escalating losses is policy failure. It is well known that centralised, taxpayer-funded ex post disaster relief has actually encouraged development in risky jurisdictions and also weakened incentives for ex ante precautions in such jurisdictions (moral or "charity" hazard). Less well known and analysed is the role played by centralised ex ante development subsidies-often masquerading as protective investment-in distorting incentives. This paper develops a simple three jurisdiction model in which homogeneous jurisdictions decide by majority vote in a centralised legislature on the centralised (federal) share of ex post loss and centralised spending an ex ante development in a Beneficiary jurisdiction, taking into account how these decisions about centralised spending impact local Beneficiary jurisdiction incentives for precautions against ex post loss. The model shows that the marginal cost of ex ante federal development spending may be greater for a Beneficiary jurisdiction than for a Contractor jurisdiction. This somewhat technical result has an observable implication: evidence that a small fraction of ex post loss in a Beneficiary jurisdiction is centrally compensated (shared across jurisdictions) is evidence that ex ante development subsidies there may be truly precautionary on net; conversely, evidence that a Beneficiary jurisdiction has a large share of its ex post hazard loss compensated by centralised disaster relief suggests that the ex ante development subsidies received by that jurisdiction did more to encourage new development and increase the amount at risk than they did to protect existing development. The model is extended to consider how ex post loss sharing impacts the demand for federally subsidised disaster insurance and other related issues.

United States Federal Emergency Management Agency regional clustering by disaster exposure: a new paradigm for disaster response

“…Hurricane Maria also highlights the moral hazard of potential dependence on FEMA, not as a supplemental response but as the primary one (Long 2018 ; Johnston 2012 ). The public good of pre-disaster mitigation is in this way inherently regional.…”

“…The public good of pre-disaster mitigation is in this way inherently regional. For example, not only might flooding of the Mississippi river impact multiple states at one time, but levee construction may well involve federal engagement of contractors outside a state like Louisiana (Johnston 2012 ). Others have demonstrated significant political motivation behind disaster declarations and their subsequent federal relief payments, showing correlation not only with a state’s political importance but also with election year occurrence and even congressional subcommittee membership (Garrett and Sobel 2003 ).…”

Insurance engagement in flood risk reduction – examples from household and business insurance in developed countries

“…In New York additional requirements for elevation and wet and dry flood-proofing of buildings exist, which are distinguished according to whether a building lies in a coastal or an inland risk zone (Aerts and Botzen, 2011). While NFIP was evaluated positively for limiting the vulnerability of new buildings, it was criticized for its poor land-use management, i.e., giving incentives to settle in hazard areas instead of limiting new developments in flood zones (Aerts and Botzen, 2011;Johnston, 2012;Pompe and Rinehart, 2008). In Switzerland, insurers are also involved in the process of enforcing building codes.…”

“…Economic losses of weather-related hazards are already high and expected to increase in the future (CEA, 2009;Jongman et al, 2014;Paudel et al, 2015;Swiss Re, 2012). Mainly socioeconomic developments, but also climate change, can largely be held accountable for rising loss trends, with valuable assets increasingly exposed to flood risks (Alfieri et al, 2016;Botzen et al, 2010;Hoeppe, 2016;Kundzewicz et al, 2014;Morita, 2014).…”

When is it beneficial for insurers to engage in climate change adaptation – a cross country comparison

“…In New York additional requirements for elevation, and wet and dry flood-proofing of buildings exist, which are distinguished according to whether a building lies in a coastal or an inland risk zone (Aerts and Botzen, 2011). While NFIP was evaluated positively for limiting the vulnerability of new buildings, it was evaluated negatively for its land-use management, giving incentives to settle in hazard areas, instead of limiting new developments in flood zones (Aerts and Botzen, 2011;Johnston, 2012;Pompe and Rinehart, 2008). 5…”