A new study from the nonprofit First Street Foundation projects the impact climate change may have on U.S. flood losses.
The report – The Cost of Climate: America’s Growing Flood Risk –finds that, when adjusting for the long-term impact of a changing climate, nearly 4.3 million homes have “substantial” flood risk that would result in financial loss.
“If all of these homes were to insure against flood risk through the National Flood Insurance Program (NFIP),” the report continues, “the rates would need to increase 4.5 times to cover the estimated risk in 2021, and 7.2 times to cover the growing risk by 2051.”
Last year, the foundation released a report indicating that nearly 6 million U.S. properties could be at greater risk of flooding than currently indicated by Federal Emergency Management Agency (FEMA) flood maps.
The new report is particularly resonant as FEMA prepares to implement Risk Rating 2.0, an initiative to make flood insurance pricing more representative of each policyholder’s exposure and help customers better understand their risks and the importance of having flood coverage. It plans to accomplish this by using industry best practices and technology to deliver rates that “are fair, make sense, are easier to understand, and better reflect a property’s unique flood risk.
Implementation of Risk Rating 2.0 is scheduled to begin in October 2021.
Since homeowners who have federally backed mortgages and reside in FEMA-designated Special Flood Hazard Areas (SFHA) are required to buy flood insurance, the First Street data serve as an example of an early indicator of who could be most affected by risk-based rate changes in the near term and as the impacts of climate change evolve.
Potential cost consequences of expanded coverage under NFIP – or, worse, of not addressing the existing flood-protection gap – underscore the importance of a multi-pronged approach to mitigation and resilience that includes improved attention to how, where, and whether to build or rebuild and expanded availability and affordability of insurance.
Texas in recent days has become the latest poster child for government failure to prepare for catastrophe.
A Washington Post analysis places last week’s “rolling disaster” – with more than 14 million people in 160 counties experiencing power loss and water-service disruptions due to severe winter weather – alongside the U.S. federal government’s failure to anticipate and prepare for a global pandemic.
“Other such episodes of government caught by surprise are etched in people’s memory,” the article says, citing Hurricane Katrina and the 9/11 terrorist attacks as precedents. “It is rarely the case that these disasters strike without warning…. As many government officials have said, there is little incentive and almost no political reward for investing money to head off a crisis.”
Blame is being apportioned for Texas’s failure to mitigate what now has to be recognized as an inevitable confluence of extreme weather conditions with infrastructure vulnerability. It certainly seems as if investment in a handful of cold-proofing measures for the state’s independent, lightly regulated energy system might have prevented much of the suffering.
But what about other states suffering from service disruptions and their toll in human pain? And what about the next “unforeseen” catastrophe?
Instead of pointing fingers for actions not taken, it might be more productive to focus on developing a national and global culture of resilience; communicating the objective value of understanding, anticipating, and mitigating the impact of natural and man-made risks; and taking steps in advance to promote resilience in the aftermath of events that can’t be avoided.
This is what Triple-I, its members, and partners have been doing. Our Resilience Accelerator curates and shares data and insights from across the risk-management world with a focus on promoting resilience best practices. Our Joint Industry Forum annually brings together insurance and risk-management leaders and subject-matter experts to explain and update anyone with an interest in risk on the latest trends, developments, and solutions. We produce webinars, hold educational town halls, and regularly engage with the news media to help inform their coverage.
We also play an active role in helping to close the oft-mentioned “skills gap” in the insurance industry.
“The risks we all face—whether natural or man-made—are top of mind for younger generations,” Triple-I CEO Sean Kevelighan said recently. “We’re beginning to see these future leaders turn to insurance. They are beginning to understand that our 350 years of history, of managing risks of all kinds, is truly a catalyst for solutions. These solutions will result in a more resilient and protected world.”
Many households and small businesses don’t have sufficient savings to repair and rebuild after a natural disaster. Insurance is a vital source of recovery funds, but many are uninsured or insufficiently insured. This insurance gap doesn’t just reduce their resilience; its impact can slow the recovery of entire communities.
Community-based catastrophe insurance (CBCI) – arranged by a local government, quasigovernmental body, or a community group to cover individual properties in the community – may help close the coverage gap. A recent Marsh & McLennan report looks at such arrangements and how they can promote community resilience.
In addition to improving financial recovery for communities, CBCI can provide more affordable disaster insurance coverage and could be linked directly to financing for community-level hazard mitigation. It offers multiple delivery models so officials and risk managers can explore and implement CBCI as part of an integrated risk management strategy.
Four broad institutional structures for CBCI illustrate the different roles and responsibilities of the community and other partners:
• A facilitator model
• A group policy model
• An aggregator model
• Purchase through a community captive.
In these frameworks, the community’s role and responsibility increase from lowest to highest. In the first, the community is more of a facilitator and a negotiator. In the second, it takes on a role in distribution, choosing insurance options and collecting premiums. In the third, the community plays a dual role: as the insured on a contract with a reinsurer and as the disburser of claims funds.
The fourth model harnesses an existing structure — an insurance captive — that enables the community to provide disaster policies.
“In all cases, the community could offer the coverage for a property owner to voluntarily decide to purchase, or there may be a few instances where a community would compel residents to purchase coverage,” the Marsh report says. “When coverage is voluntary, however, a community would likely need to offer purchase incentives to achieve goals of widespread take-up of the coverage.”
The report describes the four models in detail and provides a five-part roadmap for implementation.
The insurance industry is uniquely positioned to provide leadership in the public policy dialogue over climate risks. Our contribution to this conversation is crucial because insurers recognize the growing intensity of threats to the properties insurers financially protect.
In 2020, the U.S. witnessed a record hurricane season with 30 named storms; 12 of them made landfall. We also observed the worst wildfire season on record with more than 10 million acres burned—roughly the size of Maryland.
The U.S.’s auto, home, and business insurers cumulatively saw their catastrophe-caused insured loss payouts more than double to $47.1 billion for the first nine-months of 2020 from $21.5 billion in the same nine-month period a year earlier, Verisk and the American Property Casualty Insurance Association (APCIA) found.
The federal government quantified this trend, too. According to the National Oceanic and Atmospheric Administration (NOAA), there were 22 weather and climate disasters in the U.S. in 2020. Damages from these disasters exceeded $1 billion each and totaled approximately $95 billion for all 22 events when including both insured and uninsured losses, NOAA estimated.
The demand for insurance industry involvement in addressing climate risks is urgent. With a new administration and Congressional majority, climate is a priority issue in Washington, D.C. Industry leaders would be wise to explore pro-actively climate risk solutions for business and society—and not wait for elected officials to prescribe a response.
I believe climate risk is a challenge that should be integrated into each insurer’s Enterprise Risk Management (ERM) framework. That means examining climate risk impacts on insurer investments, underwriting and operational priorities—and then managing all dimensions of those findings.
The Own Risk and Solvency Assessment (ORSA) framework is already in place. Adding additional resources to this process will provide further intelligence for how insurers ought to operate as we move forward. For example, at my company, we decided rather than wait for regulators to try to limit fossil fuel investments, we created a green energy portfolio. The idea was to create a position in non-carbon energy production—and be opportunistic as the economy transitions toward non-carbon alternatives.
We believe this transition can be done responsibly while still managing the primary mandate of securing financial strength for policyholders.
One of the biggest challenges we will likely face is rising consumer expectations. We also must remember the political arena often animates public expectations. As an industry, we have at times struggled to produce innovative products and services.
Whether its personal or commercial insurance, our consumers want offerings that are relevant for their individual needs, which today includes being more resilient to climate risk. Everyone in the financial sector faces these challenges but I am confident insurers have the insights and expertise to deliver the innovation required in our changing world.
Richard Creedon, Chairman of the Board and CEO of the member companies of the Utica National Insurance Group is also Chairman of the Insurance Information Institute’s Executive Leadership Committee
The Federal Emergency Management Agency (FEMA) recently unveiled its National Risk Index (NRI) for natural hazards. The online mapping application identifies communities most at risk for 18 types of events. It visualizes the risk metrics and includes data about expected annual losses, social vulnerabilities, and community resilience.
Zuzak explained that the NRI draws from a wide range of data and analytics resources and considers the probabilities or frequencies of 18 natural hazards and the population and property value exposed. Expected annual loss is calculated separately for each hazard, then summed to generate a composite score for all 18.
NRI enables FEMA to talk with communities about specific risks, identify high-impact mitigation opportunities, and learn how they can make the best use of their risk-management resources.
“NRI wasn’t built in a silo,” Zuzak said. “We brought in local and county and state governments, tribal and territorial governments to make sure we had the best available data. We also brought in academia, nonprofit organizations, and private industry to make sure we had everyone’s input.”
Part of an effort to reduce costs and eliminate inconsistent risk assessments for planning, the NRI uses a national baseline risk assessment to identify areas that offer high returns on risk-mitigation investment. The NRI can help communities:
Update emergency plans;
Improve hazard-mitigation plans;
Prioritize and allocate resources;
Identify need for more refined risk assessments;
Encourage community risk communication and engagement;
Educate homeowners and renters;
Support adoption of enhanced codes and standards;
Inform long-term community recovery.
“Nothing like this – a free, consistent, comprehensive nationwide risk assessment tool that addresses multiple hazards and includes social vulnerability and community resilience – existed before,” said Dr. Michel Léonard, CBE, vice president and senior economist for Triple-I. “This is an important addition to the toolkit of risk managers, insurers, policymakers, and others working to create a safer, more resilient world.”
Insurance is a business that promotes and demands resilience, and 2020 was a year-long case study in our industry’s ability to respond rapidly to new challenges from a firm financial foundation. Triple-I’s virtual Joint Industry Forum (JIF) provided many examples from a range of industry and academic leaders, along with insightful discussions about what the industry faces in the near and longer terms.
At the 2020 JIF in New York City, it was clear from our various panels that the industry had a full plate of priorities for the year ahead. Then came COVID-19, and a whole new set of public health and economic concerns was added to the existing exposure mix. The virus brought a strong economy nearly to a halt; while officials assessed and responded to these threats, civil unrest on a scale not seen since the 1990s broke out on the streets of many cities; historic and near-historic weather and wildfire activity descended on communities whose resources were already strained by the pandemic.
And all of the above took place amid the uncertainty created by the most contentious, chaotic election year in modern U.S. history.
Through it all, as this year’s JIF speakers described, the property/casualty insurance industry managed to shine.
“Look at how our companies performed” in the real-time shift to fully remote work, noted Chuck Chamness, President and CEO of the National Association of Mutual Insurance Companies (NAMIC). “Then look at the dynamic changes in our businesses caused in large part by the pandemic, where we gave back $14 billion in premiums to policyholders and contributed a couple of hundred million dollars-plus in charitable contributions. We really did our job this year.”
David Sampson, American Property Casualty Insurance Association (APCIA) President and CEO, added that the “bulk of the industry came together to proactively work with agents and policymakers to create a solution that could work for all stakeholders to provide protection against widespread economic shutdown as a result of a viral outbreak.”
APCIA, NAMIC, and Independent Insurance Agents and Brokers of America proposed to Congress a Business Continuity Protection Plan (BCPP) that would allow businesses to buy revenue-replacement coverage for up to 80 percent of payroll and other expenses in the event of a pandemic through state-regulated insurance entities, with aid coming from the Federal Emergency Management Agency (FEMA), which would run the program.
Our industry also faced a literal existential threat in the form of efforts to require insurers to pay billions in business income (interruption) claims for which not one penny of premium had ever been paid. Thanks to industry leaders stepping up to educate policymakers and the media, much of this threat – though, by no means all of it – seems to have faded. Triple-I’s Future of American Insurance & Reinsurance (FAIR) campaign played a critical role in informing policy discussions on business interruption coverage, the uninsurability of pandemic risk, and the need for federal involvement to mitigate the financial impact of future pandemics.
Throughout this year’s virtual JIF, the emphasis on innovation is a consistent thread. Peter Miller, President and CEO of The Institutes, observed that the pandemic and its attendant operational and economic stresses forced the industry into innovation overdrive. He cited a member of The Institutes’ board saying 2020 “caused them to do 10 years of innovation in one,” adding that board members have told him work-from-home alone has saved their companies “one hundred-plus million dollars a year.”
Whether discussing the industry’s response to climate change and extreme weather or how to communicate the importance of risk-based pricing to policymakers, innovation is at the heart of solving every challenge (and seizing every opportunity) our industry faces. Peter emphasized the importance of using innovation strategically across the entire value chain – not just to solve specific problems as they emerge.
In addition to the panelists I mentioned above, the conversations featured a cross section of industry leaders, Triple-I subject-matter experts and non-resident scholars. If you weren’t able to attend, you can view and watch the panels here.
Intensifying rainfall fueled by climate change over the past 30 years has caused nearly $75 billion in flood damage in the United States, according to a study by Stanford University researchers.
The findings, published in the journal Proceedings of the National Academy of Sciences, shed light on the growing costs of flooding and the heightened risk faced by homeowners, builders, banks and insurers as the planet warms. Losses resulting from worsening extreme rains comprised nearly one-third of the total financial cost from flooding in the U.S. between 1988 and 2017, according to the report, which analyzed climate and socioeconomic data to quantify the relationship between changing historical rainfall trends and historical flood costs.
About 90 percent of natural disasters in the United States involve flooding, and much has been written about the flood protection gap.
“On average nationwide, only 30 percent of homes in the highest risk areas have flood coverage,” according to the Risk Management and Decision Processes Center of the Wharton School at the University of Pennsylvania, a Triple-I Resilience Accelerator partner. “Less than 25 percent of the buildings flooded by Hurricanes Harvey, Sandy, and Irma had insurance. Indeed, repeatedly after floods there is evidence of the United States’ large and persistent flood insurance gap.”
To make matters worse, a recent analysis by the nonprofit First Street Foundation found the United States to be woefully underprepared for damaging floods. The foundation identifies “around 1.7 times the number of properties as having substantial risk,” compared with Federal Emergency Management Agency (FEMA) flood designation.
Flood coverage isn’t included in most homeowners insurance policies, so many may not know they don’t have it if their bank didn’t require them to buy it before providing a mortgage. Until recently, flood insurance was considered an untouchable risk for private insurers to write, so FEMA’s National Flood Insurance Program (NFIP) was the only game in town.
In recent years, however, Congress adopted new laws to support the emergence of a robust domestic private flood insurance market. Last year, regulators provided rules that allowed private carriers to offer flood policies outside of NFIP and to qualify for the mortgage flood insurance requirement. Carriers and reinsurers are expanding their use of sophisticated models to underwrite flood risk, driving the growth of private sector flood insurance.
Differences between take-up rates inside and outside of flood zones, and in different proximities to flood zones.
These additions will expand the Accelerator’s visualization from covering only the current year to providing an historical perspective on how take-up rates have changed over time.
Take-up rates and resilience
Insurance take-up rates represent the percentage of people eligible for a particular coverage who take advantage of it. In the case of flood insurance, they are calculated as the number of insurance policies in force in a certain geography over the total number of eligible properties for which insurance can be bought.
Understanding flood insurance take-up rates is essential to assessing and improving communities’ ability to rebound from damaging events. About 90 percent of natural disasters in the United States involve flooding, the NFIP says, and much has been written about the flood protection gap.
“On average nationwide, only 30 percent of homes in the highest risk areas have flood coverage,” according to the Risk Management and Decision Processes Center of the Wharton School at the University of Pennsylvania, a Triple-I Resilience Accelerator partner. “Less than 25 percent of the buildings flooded by Hurricanes Harvey, Sandy, and Irma had insurance. Indeed, repeatedly after floods there is evidence of the United States’ large and persistent flood insurance gap.”
But understanding that gap to a degree that will support meaningful action requires comprehensive, granular data only NFIP can provide. It also requires the data to be available in easy-to-use formats. This is where the Triple-I/NFIP collaboration comes into play.
Key considerations to keep in mind when looking at take-up rates are year-over-year changes; whether the rates are by city, county, or state; and whether they are for all homes or homes in flood zones alone. During the first quarter of 2021, Triple-I’s Resilience Accelerator’s flood map will be updated with four options for users to visualize:
Annual take-up rates from 2010 to 2018,
2019 take-up rates based on 2018 renewals only,
County-wide and flood-zones-only take-up rates estimates for 2020, and
County-wide share of dwellings in close proximity to flood zones.
Historical perspective
In 2019, NFIP started publishing historical data on NFIP insurance coverage, policies, and claims. NFIP’s decision to publish this data was a transformative point for industry practitioners, academics and those involved with flood insurance analysis. The Triple-I’s visualizations use NFIP’s full- and part-year data from 2010 to 2019 and our own estimates, based on this data, for 2020.
Dr. Michel Léonard, CBE, Triple-I vice president and senior economist says: “We’ve worked closely with NFIP to ensure that our visualizations reflect the most current, accurate information available on flood insurance take-up rates. In addition, we wanted to add to the discussion surrounding NFIP take-up rates by providing less common yet insightful ways to understand and visualize take-up rates, such as take-up rates for properties in flood zones only or the share of a country’s property in different proximities to flood zones.”
Flood coverage, as opposed to water damage from mechanical breakdown inside a house, isn’t included in most homeowners insurance policies, so many homeowners may not realize they don’t have it if their bank didn’t require them to buy it before providing a mortgage. Until recently, flood insurance was considered an “untouchable” risk for private insurers to write, so the NFIP was the only game in town.
In recent years, however, Congress adopted new laws to support the emergence of a robust domestic private flood insurance market. Last year, regulators provided rules that allowed private carriers to offer flood policies outside of NFIP and to qualify for the mortgage flood insurance requirement. Carriers and reinsurers are expanding their use of sophisticated models to underwrite flood risk, driving the growth of private sector flood insurance.
“We want to acknowledge and stress how significant the NFIP Policy and Claims data is to increasing our understanding of flood risk,” Léonard said. “Good data takes a lot of work, and NFIP’s commitment to making this data available is a perfect example of public-private partnerships delivering concrete value.”
It’s become commonplace to say COVID-19 has “changed everything” and that we’re now figuring out how to live within “the new normal.” But listening to five experts in yesterday’s Resilience Town Hall, I was repeatedly struck by how much 2020 – with its pandemic and record-breaking hurricanes, wildfires, and civil unrest – has uncovered holes in our “old normal” existence that have long needed fixing.
The town hall – the last this year in a series presented by Triple-I and ResilientH2O Partners in partnership with the Resilience Accelerator – brought these experts together to discuss lessons learned from 2020 and predictions for 2021.
“Disasters can and will happen,” said Carlos Castillo, chief development officer at Tidal Basin Group, who previously led resilience efforts at the Federal Emergency Management Agency (FEMA). “The challenge is for people to recognize that they can happen to them and there are things they can do about them.”
Castillo spoke about FEMA’s Building Resilient Infrastructure and Communities (BRIC) program. In 2020, BRIC made $500 million available on a competitive basis for disaster mitigation programs. While that amount won’t solve the nation’s disaster worries, Castillo said, the idea was to encourage public and private entities to provide matching funds for efforts that would make a real difference.
COVID-19 has made even more federal money available to states and localities and spurred projects that might not be obviously pandemic-related at first glance. Castillo cited one state that is applying for federal funds to fix its roadways to improve access to healthcare facilities. Such improvements would benefit the state and its people not just during a pandemic but in all kinds of emergencies.
This matters because, as Castillo put it, “the pandemic has shown us the importance of our logistics systems. Suddenly, everybody’s competing for masks, gowns, gloves, and respirators. It’s a matter of life or death.”
Public-private partnership
Public-private collaboration was a prominent theme. Rich Sorkin, CEO and cofounder of data and analytics company Jupiter Intelligence, said that only three years ago resilience was “almost the exclusive province of the public sector.”
But by the start of 2020, he said, climate change and its impacts were among the top priorities identified by many commercial entities, “especially in financial services.”
COVID-19 interrupted that immediate focus.
“Executives were distracted dealing with disruptions in their own internal workflows and with changes in the economy,” Sorkin said. Nevertheless, he noted several positive developments, including BRIC and the Coalition for Climate Resilient Investment – an effort by insurers, investors, asset managers, analytics firms, and regulators to understand the return on investment in resilience and communicating it to financial markets.
Sorkin said he expects 2021 to be a “breakthrough year for the private sector from a resilience perspective.”
Richard Seline, co-founder of the Resilience Innovation Hub, reinforced Sorkin’s prediction, stating that “the private sector no longer leaves it to the government to be the driver of solutions.”
Behavioral change
Dr. Michel Léonard, CBE, Triple-I vice president and senior economist, pointed out that the insurance industry has continued to provide coverage throughout 2020 on economically viable terms for consumers and businesses.
“One of the reasons we’ve been able to maintain this ecosystem,” he said, “has been our work with regulators and commissioners – and increasingly with consumers, to be able to drive behavioral change.”
Léonard and the other speakers discussed the complexity of bringing about such change – the role of regulations and incentives, the importance of data-driven decision making, and getting consumers to engage in the sort of cost-benefit analysis usually associated with professional risk managers.
“Whether it’s building codes or pre-emptive risk mitigation, it costs money,” Léonard said, “Whether it’s new construction or public or private, you have to have people ultimately say, ‘It’s worth the money’.”
He added that technology – such as telematics for cars and smart-home systems – is providing data that can support arguments for change.
Eleanor Kitzman, founder of Resolute Underwriters and a past insurance regulator for Texas and South Carolina, described the fragmentation and politicization that can make such change difficult.
“We’ve got a real lack of alignment – not among interests, because the interests are aligned – but of incentives,” she said. “I’m focused on windstorms at a residential level, but also on the impact it has on communities. These storms devastate communities, and some of them never come back. And it’s so avoidable.”
Dimitri Mikhaylov working the front register at Chelsea Bagel of Tudor City
By Kris Maccini, Social Media Director, Triple-I
In support of Small Business Saturday, November 28, the Insurance Information Institute spotlights Chelsea Bagel, a business that has stayed resilient during the pandemic.
Deciding on your local bagel shop is a quintessential part of becoming a New Yorker. I’ve made this city my home for the past 17 years now, and it’s the first thing I do every time I move into a new neighborhood. About four years ago, I made Midtown East, Manhattan my home, and it didn’t take long for Chelsea Bagel of Tudor City to become my go-to shop.
Chelsea Bagel of Tudor City is owned by Dimitri Mikhaylov. He opened the shop and its sister restaurant, Chelsea Bagel & Café , along with his brother in 2015. Owning his own bagel shop became a dream after Dimitri invested in another coffee shop a few years prior. Never did he imagine just five years later, the world would be in a global pandemic.
The bagel and spread counter at Chelsea Bagel of Tudor City
“Prior to the pandemic, we were doing fine covering expenses. We had a steady flow of regular customers and high traffic from tourists. Facing the pandemic and this tough economy has been one of our biggest challenges,” says Dimitri.
In the early days of the pandemic, Dimitri had to make some difficult decisions to keep his doors open. He made reductions in staff, changed hours of operation, and withheld his own paycheck in order to pay his employees.
“The first four weeks of the pandemic, I spent a lot of my own money to meet business expenses, and I didn’t pay myself for 10 weeks,” he says. “My wife and I also had to make the decision to postpone our home mortgage for six months in order to pay for the business.”
“During that time, I thought that my business interruption insurance would have been able to help cover our losses, but after contacting my insurer, I realized pandemics are not covered. The next step was to apply for a government PPP loan.”
The small business PPP loan allowed Dimitri both to cover his expenses and hire back some staff. Since the summer, business has picked up, and he’s slowly welcoming back his regulars. There has been a 25% increase in customers in recent months compared to the start of the pandemic where business decreased by 75%.
In addition to the PPP loan, Dimitri advises that small business owners really look at their expenses to see where they can cut off spending. At the height of the pandemic, he chose to do all the buying himself, which drastically cut down the cost of goods for his shop.
“I’m hoping that the economy returns and brings customers back,” Dimitri says. “This area [New York City] relies on tourists.”
“It crossed my mind not once but many times to give up the business during all this, but hope kept me going. I have a family to feed and my employees have families to feed.”
