Green Diamond and the Moral Hazard

In 2005 Columbia Ventures, LLC, the Myrtle Beach-based developers pushing the Green Diamond (now called Vista Farms) development won a suit in federal district court to throw out the current FEMA flood map that placed the Green Diamond area within the 100-year flood plain. Columbia Ventures' beef with the map was that FEMA did not factor in the existence of levees in the area in making its determinations for the flood map. The Southern Environmental Law Center, on behalf of FEMA and a Cayce neighborhood association that opposes the project, argued that the existence of the levees were not, and should not have been taken into account by FEMA because they failed to meet the regulatory specifications that levees must meet in order to be effective enough to alter flood plains in such a way as to justify alteration of the map. Their argument can be found here Columbia Ventures won the case, but it has been appealed and is awaiting a hearing.

It is notable that the levees in controversy existed in 1976, the last time a major flood event inundated the area and failures in both their structure, construction, and placement were cited as root causes of over $4 million dollars worth of damage (and the property was not even developed at the time). At that time, and in every flood map since, the Green Diamond tract has been included in the Congaree River's 100-year flood plain. Many people interpret the "100-year" flood plain to mean that a flood can be expected in the area about once every 100 years. That is wrong. Actually the 100-year flood plain experiences about a 1% chance of flooding each year. Thus it is possible to have a 100-year flood each year for any number of years until we give up on developing the place and just call it a lake.

This brings me to the point of this post. That the NFIP exists, and that courts are willing to toss out flood maps and essentially green light the development of proven flood plains leads companies such as Columbia Ventures into what the risk-assessment industry refers to as "moral hazard"- the phenomenon that occurs when people are insured from a risk and because of that fact fail to take measures to mitigate any damage that might arise from the risk. Thus, as the moral hazard occurs in the pool of insureds, the overall cost of insurance goes up. So then, when someone like Columbia Ventures decides to develop such a risky property, the cost of insurance for all who need flood insurance rises. The problem is that flood insurance is subsidized by the federal government and any losses that are incurred by the NFIP are passed on to taxpayers. Furthermore, the problem is exacerbated by the fact that subsidized rates, by definition, are not actuarially sound- that is, they do not reflect the actual risk they insure, thus compounding the moral hazard for developers of flood-prone lands.