Flood zones and homeowner behaviour

This article from the NY Times presents a story of a community in South Dakota that is prone to flooding. Of course, residents and developers alike, aware of the flood risks in the first place, dismissed them in order to reap the benefits of living in a barren peninsula at the intersection of two rivers complete with million-dollar homes and a private golf course.

"They call it “the Dunes” for a reason, the warning went — the rivers put the sand there, and the rivers could sweep it away. But, much like the developers, the new residents were not worried. A few even paid a premium to be closest to the flowing water of the Missouri and the Big Sioux.

Now, a little more than two decades later, the stately homes on Spyglass Circle and Pebble Beach Drive have been evacuated and the 18th hole is under six feet of water, as miles of newly built levees strain to keep this community from surrendering to a historic flood".

“Most people don’t understand what flood risk is,” said Gerry Galloway, a civil engineering professor at the University of Maryland who has written extensively about his concerns. “They assume that if there is some level of protection like a levee or an upstream dam, they’re safe. As a general rule, public officials don’t like to dissuade them of that fact.”

This is a classic problem and often comes up in climate change adaptation research. First, people instill a lot of trust in engineering facilities such as levees or dikes instead of taking personal responsibility to protect their own homes or not live in these flood prone areas in the first place. Thus their perception of safety is based on infrastructural investments that are not even designed to account for frequent and strong floods in the first place.  I wouldn't blame the people though, much of this stems from bad policy.

In Matt Kahn's Climatopolis, he discusses the idea of the land assembly problem which is relevant to the story from the NY Times:

"An example comes from the state of Missouri where some local governments encourage developers to develop on high risk flood plains. This so-called "land assembly problem" allows developers to build on really cheap land in flood prone areas and make huge profits. The local government is excited about the new tax revenue and the job creation that accompany these projects. Alas, when floods happen in that state the federal government comes in a bails out the developer with tax payers' money because they were foolish enough in the first place to build in risky areas".

The second problem:

"As the years passed, those who dismissed a flood as unlikely started talking about it almost as an impossibility. Most residents dropped their flood insurance; only 172 homes in the entire county now carry it, backing studies that found that homeowners typically dropped the insurance after several dry years.

After about a decade, concerns about the less predictable Big Sioux prompted the construction of a levee, which led the government to reduce the flood risk for another 160 lots — removing the flood insurance requirement and making them easier to sell" (NY Times)

The problem above stems from the U.S. National Flood Insurance Program (which covers more than $1.2 trillion of assets today).

A couple of authors from Resources for the Future suggest that annual insurance contracts should be long‐term policies tied to property and not the currently‐standard one‐year policy tied to the property owner. Such a change will encourage people in high risk areas to think more about the long‐term and invest in cost‐effective adaptation measures that reduce losses from future floods and hurricanes. Under the current program, people can cancel their coverage after two or three years, as many do today when they have not suffered losses. As a result, when disasters do happen, everyone pays for it (through tax payer dollars).

If you are interested in this topic and what kind policies can be put in place to avoid developers from building in natural disaster prone areas, read Matt Kahn's book "Climatopolis" and/or this article from Resources for the Future (RFF).

The one thing I would say (which simply echoes Kahn and the RFF) is that insurance premiums should reflect risk to provide signals to individuals about the hazards they face in living in such areas and to encourage them to engage in cost-effective mitigation measures that reduce their vulnerability to catastrophes. With a clear signal of likely damage to those living in flood‐prone areas, people will think more carefully about living there. "Risk‐based premiums would legitimize providing discounts to policyholders investing in cost‐effective adaptation measures".