That’s fine. If it’s not possible to buy insurance for a particular house at a price that you can afford, don’t live in that house. The state’s other taxpayers shouldn’t be assuming your financial risk.
Say the city has invested in infrastructure, has a thriving industry etc. That typically isn't "portable". To get a return on that investment they need residents.
The residents naturally want things like insurance etc. It's high though - a barrier to entry. The city runs the numbers and decides that a resident is a net win even after insurance subsidies are applied.
Now granted, the calculation isn't that simple, and usually these things come with much hand-waving. But its not as simple as "other tax payers assuming the risk".
It seems like sunk cost fallacy is at play here. When is it time to stop throwing good money after bad, and start thinking about a managed retreat?
Private insurance doesn't have the same upside
I don't know if I agree with this but am answering your question fwiw
That said, there are some cities that have a local income tax so, in theory, one can imagine a scenario where, as a development project, some local government convinces high-income artisans or work-from-home workers to move into extremely cheap housing by subsidizing their disaster (flood, fire, earthquake, etc.) insurance. This is again likely a paradox: if high-income people wanted to live there, the housing wouldn't be cheap anymore.