Disaster Relief: Does Setting a Deductible Make Sense?

WASHINGTON—What if the disaster relief that states and municipalities receive from the federal government came with a deductible, a bit like auto insurance? Some advocates suggest that such a policy would encourage better use of taxpayer money by reducing the federal costs of disasters and giving greater responsibility to state and local governments, who would feel a stronger incentive to invest in risk reduction.

In a new policy brief—FEMA Public Assistance Grants: Implications of a Disaster Deductible—Resources for the Future (RFF) Fellow Carolyn Kousky, Resident Scholar Leonard A. Shabman, and Research Assistant Brett Lingle look carefully at the implications of that idea. Kousky and Shabman are nationally recognized experts on flood insurance.

They authors note that among the factors that have led to policy discussions about how we fund disaster costs across all levels of government are the impacts of large emergency spending bills that the United States has experienced in recent years, specifically from Hurricanes Katrina and Sandy as well as the attacks of 9/11. Partially in response to these large costs, the Federal Emergency Management Agency (FEMA) put forward a proposal to establish a disaster deductible that would require a state to spend up to its deductible before FEMA would provide public assistance funds.

The policy brief notes that a disaster deductible would reduce public assistance spending by a small percentage while eliminating a much larger share of declarations. A deductible would thus save on administrative costs, as the number of declarations is sharply reduced. At present, however, there is insufficient information about the deductible to evaluate whether it would incentivize mitigation by state and local governments. The incentive effect of the deductible will depend critically on how it is designed.

Read the full policy brief: FEMA Public Assistance Grants: Implications of a Disaster Deductible.