Individual and Societal Responses to Natural Hazards

In spite of a vast and growing body of literature devoted to the ‘wise’ and ‘rational’ development, use and management of lands subject to floods, fires, droughts, erosion, landslides, hurricanes, typhoons and earthquakes, we continue to observe the opposite. People continue to build and live on lands subject to natural hazards. People develop and live on floodplains along rivers. They construct and occupy homes on coastal lands bordering seas and oceans, in forests, and on the tops of unstable cliffs. They live on geologic faults in regions subject to earthquakes. People do these things even at the risk of their property being flooded, burned, eroded or damaged, if not totally destroyed in other ways.

Observe, for example, the strong desire expressed by many, who lived in New Orleans, to restore and rebuild their homes and property, even though they know they can suddenly lose everything from just one big storm. Development in hazardous regions continues. Damages caused by natural hazards continue to increase, despite increased investments in hazard protection and mitigation (Cutter and Emrich 2005; Downton et al. 2005; Pielke et al. 2002). Why?

Is it people’s lack of understanding, or their lack of even wanting to consider the actual risks and their consequences? Why are we less afraid of dying from a catastrophic flood than from brain cancer, where the risk of getting cancer is much less than that of being drowned? Why do we spend more to prepare for a less likely hazard when the outcome can be equally fatal?

Given the deaths, the social costs and major property damage resulting from last year’s hurricanes Katrina and Rita and the recent floods in the northeast, let’s focus, for the moment, on floodplain development. When substantial storm damage occurs, as it appears to be doing with increasing frequency and intensity, commissions and blue-ribbon committees of one kind or another are created and charged with finding out why, and making recommendations as to how to avoid such losses in the future. Their reports and congressional testimonies, inevitably suggesting restrictions on the development of lands subject to floods and more investments in flood protection, are added to those of previous commissions and organizations, including those of Gilbert White and his colleagues in the mid 1950s, the more recent Galloway’s Interagency Floodplain Management Review Committee in the mid 1990s (IFMRC 1994; Galloway 2005a), and others prompted by Katrina and Rita (e.g., Carter 2005; Landers, J. 2005). Each report focuses on how we might go about reducing this endless cycle of spending more money on flood protection and mitigation, while experiencing increased expected annual flood damages. Then as time passes since the last damaging flood or storm, these recommendations, if they were even taken seriously in the first place, are increasingly ignored (Galloway 2005b).

Why is it so difficult, for example, for us to leave floodplains and coastal regions free of development, thereby enabling them to better perform their natural functions, namely to reduce peak flood velocities and elevations, to improve water quality, and to support natural riverine ecosystems? The same question can be asked of those who build homes in forests that can, and do, burn, or on steep and unstable slopes whose soils slide downhill, or on shorelines whose lands erode from high water levels and strong winds accompanying storms. Add to this list the risks people willingly take living next to potentially active volcanoes, or on lands near major geological faults.

Is this the result of the urge to gamble, i.e., risking hazardous events, to reap benefits—economic and other, when the situation is otherwise? Are people misled into thinking they and their homes are safe; and if not, that the government will always provide relief? Even those who appreciate the extent of the risks and their possible consequences on their lives, obviously participate in the gamble. And clearly from the viewpoint of the developer and local governments, developing these areas provides profits from construction and increased tax revenues.

Could it be that from a national economic perspective, the expected economic benefits of developing those regions exceed the expected losses when hazardous events occur? Even large magnitude, catastrophic events like Katrina do not have a major impact on the national economy, though they cause considerable social and economic disruptions on the local economy. Despite the ineptitude, inefficiency and chaos associated with the response actions to Katrina, the cumulative effect of multiple government programs usually provides a “safety net” to various degrees, if only to compensate individuals after the event (SBA, FEMA programs, etc.)

Preparing for floods, fires, or earthquakes, especially in vulnerable areas, should include well integrated design standards for protection works and evacuation plans. But even if there are none, as is the case in many hazardous regions, people seem to value the benefits of living or working there. They are willing to pay more for the easy access to other residential, commercial and cultural developments, transportation networks, and possibly ready access to water-based recreation activities. If the costs of increased protection are less than the increased benefits derived from that increased protection, it pays to protect, for example, building levees and dikes, implementing channel widening and deepening, installing flood proofing, and providing flood storage capacity in upstream reservoirs or temporary flood discharge basins. Implementing non-structural mitigation options (such as insurance, or subsidized low-interest disaster assistance loans) also help. In short, we develop hazardous areas when we perceive the expected marginal benefits of such development exceed the expected marginal costs. This development justifies additional protection that, in turn, fuels more development, which in turn, justifies more protection; and so the development–protection cycle continues. Do our land use policies, rules and regulations continue to promote development in high-risk, high-hazard zones? Does this cycle lead governments to inadvertently promote “moral hazards”—i.e. provide incentives for individuals to undertake risky, or at least questionable, actions they normally would not take on their own?

The high benefits-low cost perception seems attractive to the land developer, the eventual owner, and the local governments collecting property tax revenues. When a natural hazard occurs we can always “bring in FEMA, the SBA and/or the U.S. Army Corps of Engineers” to clean up the mess and prevent such an event from ever happening again! Such reasoning is flawed, but it often works for the economic lifetime of many facilities that are subjected to “normal hazards,” such as a series of four category–two hurricanes in Florida in 2004. But what about the big catastrophic events?

Just how much do we want the public agencies to spend to protect those who subject themselves to both the benefits and risks? Should we spend another billion in added flood protection for a population living in, say, the lowest areas of New Orleans, or would that money be better spent on improving their schools and healthcare facilities? The answer would probably depend upon the time elapsed from the most recent devastation. Governments haven’t been able to come up with a clear and unified standard for an appropriate level of protection. The various local, state and federal agencies that are in charge of protecting people from, or responding to, the consequences of catastrophic events have not agreed on this fundamental philosophical issue, including their respective responsibilities in such events, or who bears the expense. Hurricanes Katrina and Rita have exposed this array of festering philosophical differences, which again stems from the risk-reward gamble.

Consider, for example, property on lands subject to flooding. The risks can be reduced by upstream flood control storage, if applicable, and by river or canal channel improvements and levees. These structures protect whole communities from floods up to some estimated design return period, usually all at the taxpayers’ expense. Flood–proofing of individual properties can decrease the probability (and thereby increase the return period) of flood damage events by creating a higher barrier against water levels. For example, one can build on stilts or construct waterproof walls around properties. Insurance can reimburse the victims if their properties are damaged despite such efforts.

Both flood–proofing and insurance, if available, cost the owner money. The question for floodplain occupants is, what is the extent of flood–proofing (increased flood return period) and insurance level that maximizes their expected annual net benefits. The question for governments is, what is the mix of provided protection (e.g., levee heights), flood–proofing and insurance that maximizes property tax revenues, minimizes government costs associated with servicing and protecting development on hazardous lands—when appropriately viewed in the content of larger social, economic, legal liability, and political issues in the region.

One can construct a simple economic model that includes the insurance and flood–proofing options available to such landowners. This model may help explain the behavior of many people who choose to live on floodplains. We made some high estimates of costs and low estimates of benefits, just to see how much expected net benefit could be reliably obtained from living on a site with existing protection up to a T-year flood, with or without additional flood–proofing and insurance. We assumed the annual cost of any flood–proofing is a convex function, i.e., one with increasing marginal costs associated with increasing protection provided by that flood–proofing. (The actual cost functions would likely be concave over at least a portion of the increase in return period P, showing decreasing average costs, which would favor more development than would a convex cost function.) These cost functions will, of course, be unique to each property. We assumed insurance could be purchased to recover any or all of the flood damage, should it occur. Furthermore, we assumed that if a property were flooded, the damage would be a fixed fraction $\delta$ of its assessed value and that this would also be the cost of repair. Full insurance (indicated when the fraction, I, of assessed value covered by insurance, equals 1) was conservatively assumed to cost $4 per thousand dollars of assessed property value, per year.

Finally, we assumed that the additional annual benefit from being on the floodplain equals a fraction $\beta$ of the assessed property value. The expected annual benefit per dollar of assessed value is, therefore, $\beta$ times the probability of not being flooded, $[1-1∕(T+P\left)\right]$ , plus the return from insurance $\left[\delta I\right]$ , if any, every $T+P$ years on average.

The expected benefits derived per dollar of assessed value from the property, when no flood occurs, $\left[\beta \right][1-(1∕(T+P)\left)\right]$ , plus the expected income from insurance, if in force, when a flood occurs, $\left(I\right)[\delta ∕(T+P\left)\right]$ , less the costs for flood protection, $C_p{P}^{\rho }$ , and insurance, $4\left(I\right)∕1000$ , if any, less the expected cost of repairing flood damage when the flood occurs, $[\delta ∕(T+P\left)\right]$ , equals the expected annual net benefits per dollar of assessed property value.

The fraction of insurance coverage, $I$ , is no greater than 1.

Note that as T increases at no additional cost to floodplain property owners, so do their expected annual net benefits. For increasing fractions of assessed value $\delta$ being damaged, and the greater the risk of flooding (i.e., the smaller the $T+P$ ), the more desirable it will be to have full insurance coverage. It only makes sense to buy insurance if the marginal expected damages without insurance, $\delta ∕(T+P)$ , exceed the marginal cost of insurance, 0.004 in this case.

Assuming no flood–proofing is done and that the fraction $\beta$ of assessed value representing the additional annual benefit obtained from the property is a minimal 0.1 and the corresponding fraction of flood damage, $\delta$ , is 0.5, it pays to buy full insurance when the flood return period $T$ is less than 125 years, and not to buy any insurance when the flood return period exceeds 125 years. This breakeven return period will increase as the damage fraction $\delta$ increases. If the expected damages per event increase, so does the protection return period before buying insurance. With or without insurance coverage, owners of property on floodplains will want T to be as large as possible, as long as they are not directly paying for this protection. With $\delta$ equal to half the property value and without flood insurance, positive expected net benefits occur for values of $T\ge 6$ years. With full flood insurance, the net benefits are positive for values of $T\ge 2$ years, regardless of the amount of damage. This almost says that with insurance, it pays to build anywhere but in the water! With $\delta$ equal to 1 (complete destruction per hazardous event), the net benefits are positive for values of $T\ge 10$ years.

Considering flood–proofing, $P$ , as well as insurance, I, and assuming the annual cost of flood proofing is $P^{1.1}∕\mathrm{10,000}$ per dollar of assessed value, flood–proofing such that the combined protection of $T+P$ is about 180 to 200 years seems most beneficial, depending on the value of $T$ . Flood insurance is not beneficial, in this example, no matter what the value of T. If the protected return period $T$ exceeds 123 years, no insurance is desired and flood proofing to provide a total return period $(T+P)$ of about 190 years seems desired. These results, of course, are dependent on our assumed cost and income values. Higher flood–proofing costs compared to insurance costs would make insurance a more attractive option.

Given the above indication that it often “pays” to occupy a hazardous area, how much protection should the government provide, i.e., how large should the protected return period T of that hazard be? This will depend on the value of property and the infrastructure in the area.

Consider a portion of a city of 400,000 households located in an area subject to flooding. Assume, existing protection prevents flood damage from storms having expected return periods of 100 years or less, i.e., probabilities greater than 0.01 of occurring in any year. For storms exceeding this 100-year return period, flood damage will occur. Assume a 150-year flood will cause $4 billion (an average of $10K/household) damage, due to some flooding of interior basements. The 200-year flood will cause damage amounting to $10 billion (an average of $25K/building), that includes minor damage to local infrastructure as well. A 500-year flood will cause $40 billion damage (an average of $100K/building) that takes into account major damage to roads, bridges, and utilities. In addition, there will be loss of jobs and income. The 1000-year flood will result in the complete catastrophic destruction of all buildings and infrastructure, totaling $100 billion (an average of $250K per household). Under these assumptions the annual expected damage is approximately $266 million or an average of $665 per household per year.

Next, let us assume that those who occupy this floodplain want to improve their flood protection to safely deal with a 1,000-year storm event. If that protection were provided, the expected annual damage would reduce to about $100 million (an average of $250 per household per year). The annual expected benefit of that improvement in flood protection amounts to $266 - $100=$166 million. Assuming, the annual increase in property value equals the inflation rate, and the real uninflated annual discount rate is 2%, the net present value (NPV) of that expected annual benefit over a 30-year life of the protection works amounts to over $3.7 billion.

If the benefits of improved flood protection are allowed to equal the investment costs, so that the benefit cost ratio equals 1, and if we deduct a 30% per year for maintenance and repair costs, for which local governments are usually responsible (and usually put off paying), then we can justify spending about $2.6 billion on flood protection infrastructure.

Assume the residents of this area desire protection from storms having return periods up to 1,000 years. The cost of a levee that will provide this level of protection is about $50 million per mile. This will be no ordinary levee protecting from, say, a 200-year storm. It will be a thick reinforced concrete wall that rests on sheet piles that are driven over 25 feet into the ground. $2.6 billion will buy about 52 miles of such levees, protecting an area of, say, 13 by 13 miles. This is sufficient to surround 400,000 households located in this square area if, on average, each household lot occupies no more than a quarter of an acre. If more than 52 miles of levees are needed, these residents might have to accept a slightly less–expensive levee and hence, a greater risk of flood damage. Or, they would have to increase the value of their floodplain development to justify a greater protection expense! Now that is a frightening idea: encourage development in an unwise area, so as to increase the resources available to pay for protection. But it happens, even today.

The method described above generally follows current USACE Engineering Guidelines (Chapter 2 in USACE 1996). It would seem that relatively high levels of protection would be justified for urban areas like New Orleans, St. Louis, Kansas City, and Sacramento. So, how do we explain the low levels of existing protection (typically in the 100–300 year return period range?) One answer is that Corps of Engineers’ regulations for economic analysis of flood damage reduction are based only on the infrastructure that is in place, at the time of analysis. This is partly to avoid the moral hazards of encouraging future development in high-hazard zones, as well as to reduce the risk-cost impacts of the selected project design. Clearly, this is wishful thinking. Another contributing factor is the Corps cost-sharing requirement. Even though the federal government generally bears 60–70% of the costs of flood protection projects, the local sponsors must provide the remaining costs, most of which are in the form of “lands, easements and rights of way.” The larger the project (i.e. the greater the level of protection, the higher the levees and the greater their length), the more the local sponsors must pay. Cost-sharing provides an incentive against “over-building” and “gold-plating” projects.

By comparison: the Dutch Delta Committee, created after their “Katrina” in 1953, in which some 2000 people perished, carried out a similar analysis for the low-lying part of Holland along the coast, that housed about 3 million people at that time. Given local costs of improved flood protection and the estimated damage per affected person, the Committee decided to build levees that would protect from coastal storms with probabilities of 1/10,000 in any year. They assume these levees, plus some freeboard, would be able to protect them from coastal storms up to a 125,000-year return period, since such storms typically last only a couple of hours (Dijkman, J. 2005. Personal communication).

These simplified analyses seem to suggest the reverse of “build it and they will come.” Rather it is “come develop, and society will then protect you or bail you out, if you survive a hazardous catastrophe.” With or without such protection or damage reimbursement, occupiers of hazardous lands may not necessarily be irrational, at least from an economic viewpoint.

The profits to developers of floodplains, or in forests, or along faults or seacoasts, can be large, and their exposure to risk is relatively short. Furthermore, many local governments needing greater tax revenues encourage such developments. Neither the developer nor the local municipalities have to pay the costs incurred by those whose properties are flooded, or burned, or eroded. And even from the owners’ perspective, given today’s subsidized insurance costs, the economic benefits may exceed the added costs due to higher risks. If the government provides, at taxpayers’ expense, damage assistance and/or partial insurance coverage and protection that decreases the expected loss, then there is even a greater incentive to occupy such lands and reap the benefits while they last.

Recognizing that it is hard to get Congress, state and local governments to allocate money for added flood protection to places like New Orleans, Kansas City or Sacramento, except just after there is a major damaging event, one could consider the possibility of funding such investments with a flood protection assessment. New Orleans has Levee Boards that collect such fees, but the funding has not been adequate for maintaining those levees, much less for improvements and adaptation to new conditions. This fee could provide the funds authorities need to ensure greater protection. If, for example, everyone owning property in New Orleans paid a $100 annual flood protection fee, the Corps and other agencies would have more than the amounts the Corps has been requesting, prior to Katrina, to improve New Orleans’ levees. Maybe that would have been cheaper than what those individuals, whose homes and jobs have been destroyed, let alone the rest of us, are spending now to restore their lives and redevelop that city. Most of us pay fees for water supply and wastewater treatment services; why not flood protection services as well, if we live in flood-prone areas? Such a fee would also maintain a local awareness that there is some risk of living in a floodplain.

Having said all this, we would like to think, in a rational world, governments might leave floodplains for floods, ecosystem benefits and other environmental services those lands can provide. However, we suspect that, even considering these flood control and ecosystem benefits that are lost if the land is converted to concrete and asphalt, and the social and human physical and psychological costs of getting really wet, the economics of floodplain development would tell us to develop those lands and expect to get soaked once in a while. That’s why we develop and occupy them, and gamble that we won’t have to tread water anytime soon.

However, as hurricanes Katrina and Rita have shown, not only can people get very wet, they can also die. Not all floodplains pose equal hazards to life, properties and the social structure of the communities that live there. It is one thing to own a property where one can observe riverine flooding from the safety of a nearby hillside or a neighbor’s home. It is quite another to be stuck on the roof or in an attic of one’s home, with little hope of immediate rescue and no dry land within reach.

But even given the possibility of being isolated in the middle of a raging flood does not seem to discourage people from developing and occupying floodplains, especially if “protection” is provided. The benefit–cost analyses carried out by the Corps to justify federal dollars spent on local flood protection show increasing net benefits where such protection measures have been built. This protection, paid for by all taxpayers, only increases the net benefits to owners, as illustrated above, and hence increases the income and property tax revenues obtained by the government from owners and users of these floodplain lands.

Perhaps the mistake we make is to think that all those with property in the floodplains have somehow found themselves there, because they failed to have good information that would have allowed them to make wiser choices. While the government and professionals should do a better job of providing that information, complete with information on risks, economic efficiency arguments often dictate the development and use of floodplains. The benefits derived from locating there can be substantial, particularly if inexpensive flood–proofing and insurance options are available, and some flood protection is provided, essentially free of charge.

Having made this argument that it may pay to develop risky locations, one would like to think the government would still want to discourage it. Very often, it is the poor that occupy property on the most hazardous lands, and it is they that are subjected to the trauma of experiencing damage, plus temporary, and possibly permanent, relocation. Developers may avoid telling potential owners of their risks and governments may dismiss those serving on advisory boards if they do (Sherwin 2005). But even provided with such information, the poor may not have many choices to locate elsewhere, nor the resources to escape and to deal with disaster when it occurs.

People live in hazardous areas because it is often pays to their advantage for them to do so. The benefits often outweigh the occasional damage costs. Since they do, such areas become developed and hence more economically valuable. This, in turn, justifies protection measures, leading to a cycle of increased development and incrementally increasing levels of protection infrastructure. If analysis of policies for developing lands on hazardous sites and providing protection against the hazards consider the benefits obtained from such development when the hazards are not occurring, they may well support that development, together with increased hazard protection and mitigation measures. This conclusion is not surprising, given the increased development that has taken place on many such lands over the past decades, despite the recommendations by land use planners to the contrary.

Developments in hazardous lands may be economically beneficial, not only to the local property owners, but also for society as a whole. For example, the Port of New Orleans, and hence the city that supports the port, is of crucial importance for farmers in the Midwest, who must get their produce out and agrochemicals in. Flood protection of New Orleans is of strategic national importance, as well as for a relatively small private group of locals. Yet, we all too often privatize the profits and socialize the costs. This distorts decisions at local levels, and in the case of New Orleans and other deep floodplains, invites true disaster (NRC 1995).

Suggesting that economic benefits may be gained by building on and occupying hazardous areas does not mean all such lands should be developed. There are other concerns, besides economics, that one should consider when managing land development and use. One is the intangible social and psychological costs of those who lose what little they have during a hazardous event, and have few options for recovery without considerable assistance. Another may be the loss of services that natural ecosystems on floodplains provide. Yet, development continues because society has instituted a poorly coordinated hierarchy of individually sensible principles, procedures and programs, ostensibly to solve such problems. But they are fragmented and often inadvertently contribute to the very moral hazards of living in high hazard zones that they are designed to prevent (Stakhiv 2003).

So, do we need to feel sorry for and subsidize those who incur damage when it occurs? For those who have the resources and ability to make choices—no, we don’t—especially if they make their decisions with full access to information on the risks they take. It’s our job, as professionals, to see that such information is available, presented and explained to those who can benefit from it, before they make land purchase decisions (Frech 2005). But for the poor, the disabled, the elderly and otherwise disadvantaged, we are concerned. They often have few choices, but to live in inexpensive housing located in areas where there are substantial risks. They are the most vulnerable when a disaster strikes, as Katrina and Rita have amply demonstrated. Whatever the risk, they are not likely to be able to do anything to reduce it and they clearly need and deserve public help if a disaster strikes.

Given the flooding and earthquake tragedies the world has seen in recent years, governments and the public must be better prepared to participate in their own protection and mitigation of potential property damages. We need to take an approach to damage reduction that brings all interests to the table in a collaborative approach that shares responsibilities and funding. We, in the U.S., could benefit from the establishment of a new national policy with respect to the federal financing of protection against damage of property and loss of life. Similar efforts are taking place elsewhere (Silva et al. 2004, van Meel et al. 2005). As the reconstruction of the regions devastated by Katrina and Rita proceeds, there is no better time to do it. Now would be an opportune great time to debate and craft a new national policy.