Every day online news reports tell us about floods devastating coastal areas around the world. The United Kingdom, for example, has been hammered by a series of floods over the past two years; as we wrote in March, this was the wettest December in a century. It is shocking to note that the cost of these winter floods is around $7.19 billion. This spring, a historic storm that battered Houston caused over 240 billion gallons of water to fall on the beleaguered city. While it is too early to forecast Houston’s losses, modelers are commenting that flooding is as bad or worse than Hurricane Allison which caused $7 billion in losses in 2001.
A quick survey of online sources reveals that tidal flooding in iconic cities, such as Miami, has jumped by 400% in the past decade and that 13.1 million U.S. coastal residents could face flooding from sea level rise. The relentless cacophony of news stories describing weather related disasters, in increasingly apocalyptic tones, is resulting in a reader fatigue and insouciance as respects the importance of resilience and the distinction between governmental disaster programs and private market insurance.
The 24/7 news cycle hammers us, on a minute-by-minute basis, with the message that bad things happen to both the prepared and, even more pointedly, to the unprepared. This relentless focus on newsworthy or “click” worthy disasters fosters an atmosphere of passivity and helplessness; people become numb.
The limits of government flood relief
What may be more unfortunate is that frequent reference to government relief programs, in this style of reporting, contributes to an unrealistic reliance or dependence on government disaster relief programs. Despite overwhelming scientific evidence and experience that flood risk is increasing, only 14% of American homeowners have flood insurance. In high-risk areas, fewer than half the properties carry it. One possible reason for these low take-up rates is that there seems to be a naive or at least unwarranted assumption that the government’s disaster relief programs will help people re-build their homes.
Ratings-desperate weather newscasters up to their Gore-Tex covered necks in raging flood waters often fail to report how little big dollar disaster relief programs do to help individual homeowners and businesses rebuild. Government disaster relief programs excel at helping communities rebuild but they do little for the homeowner or the business owner. In protecting a home or a business, there is no substitute for state of the art risk management expertise and, financially sound insurance policies supported by thoughtful reinsurance programs that “spread” neighborhood catastrophic risks with the global reinsurance and capital markets. The degree of a homeowner’s or a business owner’s resilience is dependent on risk management, mitigation and planning prior to the event. Both individual and community resilience is the consequence of foresight and planning, not of luck. Hope is not a strategy.
True resilience emerges when there is a broad coalition of people working together within a thoughtful national, state and local governance, regulatory and legislative framework. Individual resilience in a modern, networked and urbanized society requires both insurance and reinsurance. It is the combination of thoughtful government programs and equally thoughtful and financially sound insurance innovative risk transfer and reinsurance products that provide the incentive and discipline to mitigate risk before an event and the financial resources to recover and rebuild afterwards.
Resilience is like a strong rope. Its strength comes from individual strands being woven together and only together can that rope be strong.
The role of insurance
Insurance, however, is the strand that anchors every family, business and, in a very real sense, every community. Insurance complements and supports best building codes, discourages risky behavior and provides money to rebuild. The simple availability (or not) of insurance and how much it costs provides discipline, encourages best practices and discourages risky practices. The discipline of insurance helps encourage good public policy and makes governmental disaster program more focused and effective.
The lack of a robust private insurance market or seemingly high insurance rates, like the canary in the coal mine, are strong signals to policy makers that are serious problems that need to be addressed. In the United States, the insurance canary, for example, has been singing about flood insurance since the 1930s. Unfortunately, the lack of a robust private insurance market for various catastrophe perils is a global challenge.
This April, the Insurance Development Forum (IDF), an insurance and reinsurance group, with the support of the World Bank and the United Nations, held its first meeting to address the challenge of insurance in developing countries.
The IDF is working to create a sustainable and robust global insurance market to help the world better address the gap that exists while facing growing threats from climate change and natural disasters. The IDF’s mission is critically important because without a robust insurance market countries often cannot sustain a middle class.
After a catastrophe, insurance is often the difference between a family remaining above the poverty line or falling below. With only 10% of the economic costs of natural disasters in the developing world being insured, the IDF and the insurance industry both have a laudable mission and a difficult challenge to provide low income countries with innovative and cost-effective insurance products to help them secure the resources necessary to rebuild and protect their hard won economic gains.
This need is not limited to low-income countries. In the United States only 14% of American household have flood insurance. Over the next two years, flood insurance in the United States will create a political firestorm as politicians, insurers, emergency planners and concerned citizens wrestle with how to best provide flood insurance, increase the involvement of private insurers and, at the same time, make flood insurance affordable.
Flood a growing worry
Five factors are coalescing to make congressional, municipal and industry leaders increasing concerned about flood.
- There is the politically problematic reauthorization of National Flood Insurance Program (NFIP) in 2017. With its currently estimated $23.8 billion deficit, conservative members of Congress want to get the Federal Government and the taxpayers out of the flood insurance business. Unfortunately, they will be, in part, disappointed and certainly a bit frustrated. The private insurance market cannot fully replace the NFIP, which has created the framework for insuring flood in this country. The NFIP’s open approach to insuring risks and its politically sensitive rating approach make flood insurance available to many people at “user friendly” rates. There will be instances where the private insurance market with its primary fiduciary duty of solvency will not be in a position to mirror the NFIP’s rating structure or, on occasion, specific rates. The private insurance market will also find some risks uninsurable and may price other risks at rates that will be unattractive when compared with NFIP rates.
- New York’s experience recovering from Superstorm Sandy was mixed, and many communities struggled with uninsured or under-insured homes. These problems were compounded by technical coverage issues with the NFIP’s policies, e.g., the lack of basement coverage.
- The misguided reliance by homeowners on federal disaster programs as the primary coverage for rebuilding their homes resulted in some very sad stories.
- There is the problem of existing urban property inventories, i.e., they are located in high-hazard flood zones, difficult to remediate and economically and politically resistant to the imposition of “actuarially sound” rates.
- The growing acknowledgement that sea-level rise is a real threat to all urban towns and cities located on our coasts.
Worldwide, flood is the one of the most destructive natural perils. For a long time, especially in the United States, flood was considered by many insurance professionals to be uninsurable.
New era for flood coverage
For the first time, meteorological science and the modeling technology have advanced to the point where private market insurers can better understand flood risk. The science and the modeling technology are not perfect but they are significantly more advanced than 20 years ago. Depending on insurers’ risk appetite and, perhaps, the availability of NFIP data, insurers now have reasonable tools to consider underwriting flood insurance. Just as importantly, some global and well capitalized reinsurers and hedge funds have expressed an interest in writing flood insurance.
Flood, to state the obvious, is not a “new” risk. It’s even referenced in the Bible 32 times! What may be new, however, is the struggle our coastal cities may be facing due to the unintended consequences of three hundred years of industrialization, urbanization, globalization and technological progress. Climate change may be causing sea levels to rise and while the negative environmental and economic impact of sea level rise, regardless of its cause, is unevenly spread, the impact is particularly pronounced and potentially quite devastating to the billions of people currently living in coastal cities.
Coastal cities are the economic engines of our national and global economies; protecting them and ensuring their economic viability will be one of the seminal insurance challenges of this century. The next 50 years will be the golden age of risk management and insurance as homeowners, business owners, cities and nations look to protect their property, urban infrastructure and economy from effects of sea level rise and flooding.
As a consequence, the demand for state-of-the-art analytics, risk management expertise and private market flood insurance with enhanced coverage options will surge. This, in turn, will result in a growing demand for skilled re/insurance intermediaries with robust analytics capabilities, local and global risk management expertise, capital markets knowledge, consulting services and global transactional expertise.
And so, the answer is, “Yes.” Yes, Noah most definitely needs insurance.