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How to Fight Growing Risk of Wildfire

The U.S. West Coast is regularly confronted with the risk of conflagration if a wildfire is sparked. An estimated 3.6 million residential properties in California are situated within wildland-urban interface (WUI) areas, with more than one million of those residences highly exposed to wildfire events, according to a 2010 federal study.

However, the Tubbs wildfire – which rolled up with other California wildfires to result in some of the largest global reinsurance recoveries during 2017 – spread into the Coffey Park neighborhood that was situated outside WUI areas. This disaster amplifies the vulnerability to wildfire to even urban environments across the state and highlights the importance of continually mitigating wildfire exposure to protect people, homes and businesses. But what can be learned from this wildfire to enhance disaster planning and communications?

Mitigation approaches range from using generational lessons garnered through prior wildfires, as melded with science and technological gains, to adherence to public policy at the state, county and community levels. These strategies can unravel if absent of preventative measures taken by individuals at home or work to, for instance, expand defensible space at the property location and surrounding environment, combined with installing more effective fire retardant materials (i.e., roofing, siding, fencing, decks, etc.). All these measures are underpinned by the research and resources available through agencies or organizations such as CALFIRE, FEMA, IBHS and Firewise.

While the existing preventive measures did save lives and mitigate damage within Sonoma County, conditions and the speed of a widely spreading event combined to overwhelm emergency services and even many fortified structures that were eventually swept away by a wildfire which often flowed faster than water running downhill.

To elaborate upon such conditions, the humidity level was extremely low, westerly winds (Diablo) were fierce and swirling once engaged with wildfire, and embers the size of footballs were carried up to more than a mile away. The wind-driven conflagration ignited and leapt over a major highway into Coffey Park, an urban community situated on a flat setting and woven with tightly aligned residences often connected by fences, common shrubs and a canopy of overhanging trees. Enabled by such a common urban setting, the wildfire ignited into Coffey Park like a fast-burning fuse – the scope and speed of which can be seen in Berkeley Fire Department’s video as posted on the KTVU website. Evacuation efforts were the highest priority for first responders who also established a perimeter, aided by wider firebreaks on multiple sides, to eventually contain the wildfire flaring within Coffey Park. But the destructive wake of the wildfire ravaged Coffey Park, leaving behind nearly two dozen victims and the ruin of roughly 1,300 properties.

See also: Time to Mandate Flood Insurance?  

Without delay, and while functioning within areas situationally under control of authorities at the outset, the insurance industry moved swiftly and visibly to respond to honor obligations; immediately providing additional living expense funding, including for evacuation, and, when possible, settling property claims. However, the rebuilding campaign and P&C claims settlement process for the Tubbs wildfire, in an area with an extremely low vacancy rate prior to the disaster, will take many years to complete.

Lessons learned:

  1. From the public policy perspective, governmental entities and citizens will revisit evacuation planning, especially in light of officials deciding to issue an e-mail alert and not a widely dispersed emergency cell phone alert due to concern that such a widespread alarm would hamper emergency efforts. However, when the wildfire expanded beyond worst expectations, the unintended consequence of such a decision led to a frenzied situation in Coffey Park, with citizens making a critical difference by racing from door to door to awaken neighbors, while staff at facilities in Santa Rosa resorted to using personal vehicles to clear patients from a hospital and residents from a senior care center.
  2. A “back to the future” siren system, as a basic supplemental measure, might merit consideration.
  3. The Public Utilities Commission may need to revisit how electrical power is supplied to mountainous areas where, during violent winds, swaying electrical lines or fallen transformers / poles often result in arcing wires that spark fires that easily spread.
  4. With saving lives, most understandably, serving as the highest priority for emergency services, more insurers may consider contracting with private firefighting operations that have a superior ability to traverse steeply sloped and winding roads to reduce chances of property damage. These basic actions could involve, for example, clearing vegetation and combustible fencing with chain saws, accessing water sources with pumps, covering vents, clearing gutters and applying fire retardant foam spray to structures.
  5. Underwriting teams commonly access software tools to address wildfire exposure as part of the selection and pricing processes, as well as review output generated through portfolio models to monitor aggregate exposure. However, while steadily improving and evolving through lessons learnt, these tools offer imperfect guidance. For wildfire models, what is expected is burning along the Wildland Urban Interface with minor encroachment into other areas, with such expectations being met during the past 30-plus years [model era] subject to the notable exceptions of the Oakland Hills [1991] and Coffey Park [2017] situations. Insurers, in view of the recent dimension of an urban tragedy striking Coffey Park, may choose to (re)explore “model miss” options that could influence spread of risk and reinsurance design strategies..
  6. The industry will benefit through supporting community awareness campaigns to inspire customers to be vigilant about wildfire exposure; especially as another Coffey Park-type event could potentially recur in California or even happen elsewhere under similar conditions.

See also: 2018 Workers’ Comp Issues to Watch  

Following the series of US catastrophes, Aon visited the sites of Houston for Hurricane Harvey, Puerto Rico for Hurricane Maria, Florida for Irma and Northern California for the wildfires. The team surveyed the damage and assessed how each event evolved to affect both people and properties with the goal of enhancing catastrophe models and identifying lessons for the future. I was joined by Dan Dick, Steve Bowen, Steve Jakubowski, Jeff Jones and Weston Vosburgh.

Future of Flood Insurance

Hurricanes Harvey, Irma and Maria laid bare fundamental inadequacies of the current flood insurance program in the U.S. Too few homeowners had flood insurance in place. Federal Emergency Management Agency (FEMA) flood maps were inadequate to encompass actual flood risks and, even more importantly, outreach programs by FEMA and the National Flood Insurance Program (NFIP) were inadequate to properly communicate risks to the market.

See also: Time to Mandate Flood Insurance?  

The current hurricane season revealed an astounding lack of resiliency in the U.S. on many levels: (1) lack of insurance coverages; (2) inadequate mapping of flood risks; (3) failure to properly educate homeowners about their actual flood risks; and, (4) gross under-investment in resilient infrastructure by all levels of U.S. governments.

As Congress prepares to slash budgets and cut taxes, the fact that Hurricane Irma easily topped City of Miami’s sea walls with only Category 1 strength winds and brought a four-foot river of water down Brickell Avenue, the center of Miami’s Financial District, shows how much work needs to be done to achieve resiliency in just one U.S. city.

In its rush to reduce taxes, Congress is ignoring the U.S. infrastructure deficit, which is estimated to be in the multiple trillions of dollars by the American Society of Civil Engineers. The slide deck that I prepared for the Future of Flood Summit discusses new, cost-effective tools for flood risk modeling, flood risk report production and flood risk communication. A central theme is: “Can the insurance industry do a better job of helping insureds and societies cope with the increasing risks they are facing, as our climate changes and sea levels rise?”

You can find the presentation here.

Getting to ‘Resilient’ After Harvey and Irma

Before any “lessons learned” speechifying, we should first pray for those who lost their lives and family members and homes and livelihoods to the nearly “biblical storms” Harvey and Irma. For those still in shelters and still being rescued, we wish them Godspeed.

There are so many lessons from these two storms. Where to begin? Let’s begin with a word: “resilient.” The Merriam-Webster dictionary defines “resilient” as: (a) “capable of withstanding shock without permanent deformation or rupture; and, (b) tending to recover from or adjust easily to misfortune or change.” Clearly, as we look at our flooded and battered communities in Texas, Florida and South Carolina, we see that they are not meeting this definition.

See also: Harvey: First Big Test for Insurtech  

As individuals and societies, we strive, as we should, to be as resilient as we can be. Why? Because if we are not resilient in ourselves, our properties, our neighborhoods and our societies, we simply put our misfortunes on our neighbors, involuntarily, whether they can handle those burdens or not. Recall the story of the “Three Little Pigs” that we all learned as children. The two silly pig brothers who danced and sang and built their houses of straw and sticks ended up depending on the brother who built his house of bricks to save them from the huffing and puffing of the big, bad wolf. The wind-blowing wolf is certainly an apt analog for Hurricanes Harvey and Irma.

What makes us and our societies resilient? There are several important aspects of lack of resiliency that Harvey and Irma have starkly revealed. The majority of homeowners with flood damages in Texas and Florida in the recent storms did not have flood insurance. Most all of these people owned cars, and, because of state laws, they all had automobile casualty insurance. Driving without insurance would be unlawful, yet their homes, where the majority of their net worth was invested, were without coverage. Whatever their homes were actually made of, they were financial “sticks and straw,” without flood insurance. Flood insurance is a critical component of resilience for the individual and for society at large, which will now direct billions of its tax dollars for FEMA relief. In the case of most homeowners who were wiped out by these storms, they could have afforded flood insurance but opted not to have it.

Insurance is one component of resilience, but it is not the only factor. Let’s talk about personal responsibility. There are many relatively minor and cost-effective measures that homeowners in floody areas can take, short of raising their homes on stilts. Flood prevention investments can include: backflow preventers, storm shutters, removable flood barriers, raising electrical outlets, raising HVAC equipment off the ground, minor regrading and installing salt-tolerant vegetation. The list could go on and on.

Why don’t most homeowners in the vulnerable coastal areas make these investments? One reason is that they lack comprehensive, flood-risk-vulnerability information about their own properties. The FEMA flood maps’ “binary” approach – in or out of the 100-year flood zone – has not been effective in communicating all of the various flood risks to which homeowners are subject. For example, FEMA flood maps do not include tidal flooding risks, NOAA maximum-storm-surge risks (which may be much greater in flood height) and heavy rainfall/high groundwater risks. This is why my company, Coastal Risk Consulting, developed its online, comprehensive flood risk assessments at www.floodscores.com – to help coastal residents get climate-ready and storm-safe.

Once homeowners and their neighbors truly understand their flood risks from the “bottom up,” then, and only then, will they be able to effectively mitigate their personal risks and advocate with their town, county, state and federal representatives regarding the “top down” resiliency efforts — and appropriation of funds needed to make public infrastructure climate-ready and storm-safe. Both individual and government investments in resilience are required to make us and our communities “resilient,” especially in light of increasingly intense storms.

The next resiliency challenge for the owners of properties damaged by Hurricanes Harvey and Irma is whether and how to rebuild to become more flood-resistant in the face of severe weather to come. Many motivational speakers have orated: “In the Chinese language, the word ‘crisis’ is composed of two characters, one representing danger and the other opportunity.” Whether this is linguistically correct or not, it makes a good point. The multiple billions of dollars of property damages wrought by Hurricanes Harvey and Irma provides society with, perhaps, a generational opportunity: How should the hundreds of damaged communities rebuild themselves? Will they rebuild in the same locations and at the same elevations and with the same “lack of flood preventions”?

In “Three Little Pigs” parlance, will they rebuild houses of sticks and straw or will they build “brick” houses that can withstand the floods and winds brought on by the next set of storms? Will local, state and federal governments say “enough is enough?” Will our elected representatives work with our visionary architects and engineers to rapidly change building codes and land use and zoning laws, to begin to make our communities more resilient?

See also: Time to Mandate Flood Insurance?  

As much as I hope for such a result, I would not, however, bet the house and the dog that our politicians will say what everyone knows they should say, namely, “Enough is enough.”

Harvey Hammers Home NFIP Issue

The economic devastation and human suffering that Hurricane Harvey inflicted on vast numbers of people will sorely test the National Flood Insurance Program (NFIP) as it comes up for renewal, with the NFIP lapsing if Congress and the president fail to act by the end of the month. Some in the federal government, state regulators, industry experts and this economist favor solutions encouraging private sector participation in flood insurance markets. Near-term, the most likely and wisest course seems to be a short extension allowing the Federal Emergency Management Agency (FEMA) and NFIP to focus on settling claims while politicians and policy experts develop longer-term solutions.

With the U.S. Government Accountability Office (GAO) reporting the NFIP was $24.6 billion in debt before Hurricane Harvey, many in government and elsewhere feel significant reforms are needed. Other knocks against the NFIP as currently constituted include its reliance on allegedly inaccurate and out-of-date flood insurance rate maps (FIRMS), its failure to charge actuarially appropriate premiums and policy limits too low to provide adequate insurance protection. Some also contend that the NFIP encourages excessive risk taking and poor land use by providing subsidized insurance coverage for properties that repeatedly get flooded out, effectively divorcing those who choose to reside in flood prone locations from the consequences of their decisions.

Uncertainty about the exact extent of the devastation caused by Harvey will persist for some time, as the huge number of properties damaged by the storm, difficult conditions and continuing lack of access to some of the hardest-hit areas all add to the time necessary to assess losses. Further complicating efforts to understand the magnitude of the losses caused by Harvey, published reports often fail to clearly distinguish between economic losses, insured losses covered by private carriers and insured losses covered by the NFIP. Nonetheless, it appears Hurricane Harvey may exhaust the NFIP’s financial capacity, causing the program to go still deeper in debt.

See also: Harvey: First Big Test for Insurtech  

The NFIP purchased private reinsurance covering 26% of its losses between $4 billion and $8 billion, but Fitch Ratings believes losses from Hurricane Harvey could consume the NFIP’s $1.04 billion in reinsurance protection.

As Congress and the president ponder the way forward, the options available to them include several that would facilitate development of private markets for flood insurance akin to the private markets for homeowners insurance. Key elements of such solutions include measures clarifying mortgage lenders’ ability to use flood coverage underwritten by private carriers to satisfy insurance requirements imposed by Fannie Mae and Freddie Mac.

The development of private markets for flood insurance will also require that the NFIP adopt actuarially sound pricing. Simply put, private carriers that must cover their costs and earn an adequate rate of return on capital would be at a tremendous disadvantage competing against taxpayer-subsidized coverage from the NFIP. And it would certainly help if carriers currently participating in the NFIP’s WYO Program were allowed to also offer alternative coverage. Currently, the WYO Program includes a non-compete clause that precludes carriers from offering alternative standalone flood insurance.

The constituencies supporting increased private sector involvement in flood insurance markets include the National Association of Insurance Commissioners, the Property Casualty Insurers Association of America, the National Association of Mutual Insurance Companies and the American Insurance Association, which have all come out in favor of the Flood Insurance Market Parity and Modernization Act passed unanimously by the House in 2016.

Thinking more broadly, there may be no need for the federal government to participate directly in the flood insurance business. Mechanisms akin to state FAIR and Beach Plans could serve as insurers of last resort for property owners unable to obtain coverage from private carriers. Or, we could transition from the NFIP as it exists today to a new NFIP modeled on the Terrorism Risk and Insurance Program (TRIP) introduced after the terrorists destroyed the World Trade Center on Sept. 11, 2001. Under that program, insurers must offer terrorism coverage, with policyholders then free to accept or decline. If insured losses from a terrorist attack exceed specified triggers, the federal government provides reinsurance protection, and insurers subsequently reimburse the federal government.

Thinking still more broadly, there may be no need for the federal government to participate in the flood insurance business at all. With trillions of dollars flowing through global capital markets, catastrophe bonds and other insurance-linked securities could enable insurers and reinsurers to obtain all of the capacity necessary to cover flood risk without any federal reinsurance backstop.

See also: Time to Mandate Flood Insurance?  

An ideal solution would enable one policy to provide coverage for both wind losses and flood losses. As long as those losses are covered by separate policies, policyholders and insurers will remain burdened with having to distinguish wind losses from flood losses— a frequently contentious and often expensive undertaking that adds to the time necessary to settle claims.

In any case, private sector insurers and reinsurers now have access to data and sophisticated flood models that enable them to price and underwrite flood risk intelligently. And developments such as the new commercial flood insurance program recently introduced by ISO and Verisk Analytics set the stage for greater participation in flood insurance markets by ever greater numbers of insurers, as will the corresponding personal property flood insurance program they plan to roll out later this year. With state regulators and insurers aligned, it seems all that’s necessary to unleash the power of private markets is action on the part of Congress and the president. Why not send them a postcard?

Flood Risk: Question Is Where, Not When

Over the past year, flood insurance has become more apparent in the media and trade publications. Normally, only catastrophic events (i.e. hurricanes) capture so much attention, but the combination of some massive floods and the continued progress of private flood legislation has started conversations that are overdue. Both the nature of these storms and floods, and their impact on property owners are getting close attention, and that is welcome because it is changing the way people think about underwriting flood insurance.

Recently,  Jeri Xu of Swiss Re published an article that illustrates such a change of perception. She offers a very useful way to think of the rain events (what NOAA calls 1-in-a-thousand-year rain storms) that have caused some of the most serious recent floods (i.e. 2016 Texas, West Virginia, Maryland and Louisiana). Because these types of flood-causing storms are localized at the county-level (roughly speaking), and there are about 3,000 counties in the country, it is not unreasonable to expect three flood-causing thousand-year rain storms every year. With this insight, Xu has transformed the extremely rare to the commonplace and reconciled the headlines with the stats.

See also: How to Make Flood Insurance Affordable  

A bit of caution is needed when comparing rain events with flood events – for the sake of this argument, let’s assume a millennial downpour does result in flooding (it is not a stretch to say so).

Xu and the headlines are teaching us to stop wondering when a serious flood is going to happen – it is way more important to understand where the damage will be when the serious flood does happen.

The accepted and common way to guess where the flooding will occur is the 100-year floodplain on FEMA’s FIRMs. However, according to this article from David Bull, 85% of the losses in Baton Rouge and Lafayette were outside the 100-year flood plain and uninsured. Clearly, the FIRMs do not help underwriters (or homeowners) understand flood risk (neither where, nor when). Indeed, the FIRMs were never intended for that, as they are rate maps, not risk maps.

Instead, underwriters need information that will help them understand the likelihood of a specific property flooding when there is flooding, because the flood is coming, somewhere.

This approach is comparable to how wind (and, lately, storm surge) is underwritten. Karen Clark & Co. has taken such an approach for hurricane: The software assumes an event (the firm calls them characteristic events, or CEs) and then calculates the expected loss results based on that CE happening. There is good reason for this: Underwriters should assume a handful of hurricanes will land on the coast in a given year, just as they should assume a handful of significant inland flood events should happen annually. Working with that logic makes it less important to wonder when something will happen.

See also: Is Flood Map Due for a Big Data Make-Over?  

It has long been written about how flood losses occur beyond flood zones. Looking at flood risk by where, not when, is an effective way for underwriters to manage their business while considering this fact. More importantly, it is a view of risk that supports the creation of insurance products that can help narrow the protection gap in the U.S., because it is unacceptable to have 85% of damaged homes (in Louisiana of all places) without flood coverage.