Government takes in other taxes. The case being made is that the city wouldn't exist without being living there. So, the local government has a particular interest to enable people to live there by subsidizing.

Private insurance doesn't have the same upside

I don't know if I agree with this but am answering your question fwiw

I think in this scenario the theory is that the city will take in more in taxes than they spend in subsidies. I have no idea how realistic that is, but it seems very similar to saying that they could buy this person a house in exchange for just living in it and paying taxes, which is something I've never heard of happening.

It’s not enough to take in more in taxes than they spend in subsidies. If they’re spending that resident’s taxes on paying subsidies, there’s none left for paying for the other public services that the taxes are also supposed to pay for.

Yeah, it seems like it might pencil out if the housing is very cheap to replace (and therefore insure) but the tax revenue you can gain from it is high. Since local taxes are mostly property taxes, this is basically a paradox: if the property is cheap, the taxes will be too.

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.

The premium on insurance of last resort are quite high they may do enough to cover costs or they may not but it’s hard to Predict and model so private parties don’t bother. The juice just isn’t worth the squeeze so to say