The Perverse Effects of Subsidized Weather Insurance

68 Stanford Law Review 571 (2016)

56 Pages Posted: 14 Jan 2015 Last revised: 28 Jul 2016

Omri Ben-Shahar

University of Chicago Law School

Kyle D. Logue

University of Michigan Law School

Date Written: May 7, 2015

Abstract

This Article explores the role of insurance as 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 effort in building construction and infrastructure. Currently, however, much insurance for severe weather risks is provided and heavily subsidized by the government. The Article demonstrates two primary distortions arising from the government’s dominance in these insurance markets. First, the subsidies are allocated differentially across households, resulting in a significant regressive redistribution, favoring affluent homeowners in coastal communities. The Article provides some empirical measures of this effect. Second, the subsidies induce excessive development (and redevelopment) of storm-stricken and erosion-prone areas. While political efforts to scale down the insurance subsidies have so far failed, by exposing the unintended costs of government-subsidized insurance this Article contributes to reevaluation of the social regulation of weather risk.

Suggested Citation

Ben-Shahar, Omri and Logue, Kyle D., The Perverse Effects of Subsidized Weather Insurance (May 7, 2015). 68 Stanford Law Review 571 (2016). Available at SSRN: https://ssrn.com/abstract=2549320 or http://dx.doi.org/10.2139/ssrn.2549320

Omri Ben-Shahar (Contact Author)

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

Kyle D. Logue

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734.936.2207 (Phone)

HOME PAGE: http://kylelogue.net

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