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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?