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What is one to do with someone who builds his house on the train tracks? Let's assume that this individual knows that trains roll down these tracks once every 11 years. When one inevitably does and the owner of the home leaps to safety shortly before it is shattered to bits, how should one react? Should one help him to rebuild a new house in the path of yet another train? Or should he be labeled a fool and left to rebuild without assistance?

The citizens of New Orleans have been engaging in building practices similar to this since 1718 when the city was first founded. A flood destroyed the village in 1719. Not to be deterred, the citizens rebuilt, only to be wiped off the face of the map by a hurricane again in 1722. A year later, whatever progress they had made in recovering was again obliterated by yet another hurricane.

The current projections put the completion of repairs at 2011. If a flood hits every 11 years, and repairs take six years, it doesn't leave much time to enjoy living in the city before it is destroyed again.

It must be the single most optimistic city on the planet.

New Orleans lies mostly below sea level, near the Mississippi river, south of Lake Pontchartrain and just off the Gulf Coast. Being below sea level is fine, provided that the sea is nowhere nearby to come paying visits from time to time like some unwanted relative.

Unfortunately, New Orleans is surrounded by huge bodies of water seeking a low point to congregate ... points where the residents also choose to live. Even after 27 disastrous floods, the most recent deluge was treated as a shock.

Few, if any, news reporters or politicians dared mention this fact. Pointing out such things would have seemed mean-spirited and drawn the ire of the populous. Writing this article now, I am well aware that many readers may find this article to be in poor taste or coldhearted. But similar problems exist in many other areas of the world.

Off of the coast of the Carolinas on the East Coast of the United States, there are a bunch of very large sandbars known as the Outer Banks. Many people choose to build expensive homes on these shifting sands. When the ground erodes from under them, or when a hurricane blows them down, the residents, taken completely by surprise, immediately look for government assistance.

Lest anyone think that I have simply become an unsympathetic curmudgeon, I offer that the editors of The Economist agree. On page 14 of the July 28th issue, they published an article with the headline "Britain Under Water: Building on Sand." The authors note, "No one in his right mind would build London today."

Like New Orleans, London is surrounded by bodies of water that have a tendency to inundate certain parts of the metropolis. This does not deter Londoners from building on the low spots. The Economist places the blame squarely on the way by which insurance is written and subsidized.

It seems that citizens choosing to build on the flood plains are not charged any excess premium. There is no financial risk to building in a location that is likely to be found covered in several meters of water, because insurance will cover the loss. The premium is the same as nonflood zones due to government subsidies.

This governmental intervention is the root cause of the problem. People can be very optimistic about catastrophes. Just ask someone living on top of a fault in California--they find it absurd to worry that a large quake might shake their abode to the ground even though the leading experts agree that this is inevitable.

By continuing to offer government and insurance schemes that promise to cover future losses, this natural optimism is bolstered. Someone living in a catastrophe-prone location can reason that, even if disaster should strike, Uncle Sam or the insurance companies will remedy any loss.

The answer to the opening question, if we are to take our cue from popular opinion and government action, is that we should jump right in and help our friend build a new house on the train tracks. One can also surmise that we should show astonishment and heartfelt sympathy every time a locomotive smashes through it, leaving him homeless.

But I wonder if it is not time for a bit of common sense to enter into the dialogue. Choosing to build in the path of certain and inevitable destruction is a horrendous idea. New Orleans will be destroyed again. Why are so few willing to state the obvious? Because it sounds mean-spirited and would be political suicide (boy, am I ever glad I will never run for office!).

Perhaps refusing to help those in need would be callous. But we can at least give them encouragement to stay out of harm's way by refusing to reward the behavior.

BEAUMONT VANCE manages risk for Sun Microsystems Inc. This column was a complimentary excerpt from one of his latest "Risk Management Reports" newsletters, which he edits and publishes. For more information on how to subscribe to the full version of the newsletter, please visit www.riskreports.com/.

Click here to read Beaumont's latest Risk & Insurance® column.

And check out the reader response--critical and otherwise--to this column on New Orleans.

January 3, 2008

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