Jeff Gelles: The Sandy insurance question

"Superstorm" Sandy just a year after Hurricane Irene. Yet another damaging nor'easter. Winter weather's onslaught almost upon us.

Even if America and the rest of the world finally get the message and start working to slow the carbon emissions and climate change that threaten us, in the short run, we can't do much about volatile weather. Which brings us back to a major topic of the moment: questions about insurance, facing both those who suffered Sandy's wrath and others worried about the next big storm.

One is particularly thorny, and befits an election season that featured endless debate over "makers and takers" and government's appropriate role: the issue of whether there is "moral hazard" when federal disaster assistance is directed toward property owners who didn't have insurance coverage, as news accounts said in the days after the storm.

"So, if someone chooses to not buy insurance coverage, he is going to receive free federal money funded by taxpayers? Doesn't that make the people who did buy insurance the biggest dunces of all?" Jim McLaughlin of Broomall asked by e-mail. "They pay premiums for insurance coverage and their tax dollars go to reward the people who didn't buy insurance. What's wrong with this picture?"

There isn't a simple answer to this because insurance itself creates at least a bit of a moral hazard - the term for the danger that someone who feels insulated from consequences will be tempted to take extra risks. If you expect the government to ride to your rescue after a disaster, will you be less inclined to buy the insurance you need?

Insurance experts say the National Flood Insurance Program, and the emergency-grant program also run by the Federal Emergency Management Agency, don't seem to encourage a great deal of moral hazard.

When they explain how they prioritize assistance after any disaster, FEMA officials refer to a "hierarchy of need" for distributing aid that, by law, can cover only uninsured losses. People with insurance coverage typically have access to help from their carriers, so their immediate needs for, say, emergency shelter may be covered.

But people who lack insurance - especially flood protection in the flood-prone areas along the Jersey Shore - aren't going to come out of Sandy looking like lucky duckies. For one thing, FEMA currently caps disaster-assistance grants for uninsured losses at $31,900, and the average grant is far less - $2,982 in the most recent fiscal year. Beyond that, the main type of aid is access to low-interest loans. And owners of vacation homes aren't eligible for emergency assistance.

"It's highly unlikely that anybody is going to be made whole if they didn't have flood insurance," says Michael F. Barry, vice president of the industry-backed Insurance Information Institute.

It's not clear how many of Sandy's victims lack flood coverage. Just 5 percent of homeowners in the Northeastern United States had bought federal flood insurance, according to a survey last year by the institute - compared with 19 percent in the South, 13 percent in the Midwest, and 12 percent in the West.

Homeowners in high-risk areas such as the Shore are more likely to have coverage, simply because it's required for anyone who has a mortgage from a federally regulated or insured lender. But no one imposes flood insurance on a house without a mortgage, so people with long-standing family homes at or near the beach were more likely to be among Sandy's saddest victims.

"High risk," by the way, is defined as an area with at least a 1 percent risk of flooding in any given year - check your own status at www.floodsmart.gov by plugging your address into the "How Can I get Covered?" box.

But don't assume you're worry-free if you live in what the program classifies as moderate- to low-risk areas. The program says that more than 20 percent of national flood-insurance claims come from such areas, and that homeowners in them receive a third of all disaster assistance for flooding.

Jay M. Feinman, a law professor and insurance expert at Rutgers University, recommends checking maps or contacting an agent who handles flood insurance to evaluate where you fall on the continuum. If you're low-risk and you have financial resources, it may make sense to self-insure, he says.

But don't stick your head in the sand - or into seemingly dry ground. If you're 100 yards up from a creek that has never flooded in your memory, volatile weather patterns may put you at more risk than you realize.

"It's not the sort of thing where people should just say, 'Oh, it can't happen here,' " Feinman says. A lot of people who suffered disastrous flooding from Sandy may have thought the same thing.

One concern raised by disasters such as Sandy has yet to play out here, but it may in months ahead: rising insurance premiums.

Premiums are already expected to go up for national flood insurance. After years of complaints that the program wasn't actuarially sound, Congress authorized steeper increases when it extended the program over the summer for five more years.

The law now allows FEMA to raise flood-insurance premiums by as much as 20 percent a year, twice the previous maximum, to align revenue with actual, predicted risk. And it directs the agency to eliminate subsidies for vacation homes, those that repeatedly flood, and other properties where flood insurance has been underpriced.

Feinman says a looming question is whether private insurers will pull back from offering coverage in disaster-prone areas of the Northeast, as some have in Florida, or seek the rate increases to cover Sandy losses that some have already signaled.

Both are familiar responses to big disasters. And both will challenge state regulators, who must decide whether, and how hard, to push back.