Abstract Federal relief and insurance programs for households living in areas subject to natural disasters have evolved in the absence of private insurance. Conventional wisdom suggests that these programs serve only to subsidize those choosing to live in hazardous areas at the expense of the taxpaying public. The results presented in this paper suggest otherwise. In a simple model of housing markets, where locations are differentiated by both distance to a centrally located business district and risk of loss due to natural disasters, providing insurance to those in hazardous areas confers nonpecuniary benefits to households residing in risk-free areas within the same community. Insurance affects the long-run development of a community by increasing development in hazardous areas, allowing households to consume spatial amenities at a lower cost than if there were no insurance. Similar results obtain with regard to subsidized insurance for households at risk.