Category Archives: Disaster Resilience

Catastrophes, Disaster Preparedness, Disaster Resilience, Homeowners Insurance

FEMA Highlights Role
of Modern Roofs
in Preventing
Hurricane Damage

January 29, 2024 Jeff Dunsavage Leave a comment

By Max Dorfman, Research Writer, Triple-I

Homes with more modern roofs were able to avoid significant damage from Hurricane Ian, compared with those with older roofs, according to a recent study by the Federal Emergency Management Agency (FEMA).

Of the 200 homes surveyed, 90 percent with roofs installed before 2015 had roof damage, as opposed to 28 percent for those installed after 2015, when Florida imposed new ordinances regarding how roofs are attached to houses and how waterproof they need to be. Indeed, when Hurricane Ian made landfall at Cayo Costa, a barrier island in Lee County, Fla., on Sept. 28, 2022, it damaged 52,514 homes and other structures in the area, causing an estimated $55 billion in insured losses in 2024 dollars.

Some of this damage, according to the data, could have been mitigated by updated roofs.

History tells the same story

After the devastation of Hurricane Andrew in 1992, Florida took the initiative to develop innovative plans to prevent hurricane damage. These changes further came into effect in 2002, with a new focus on roofing. However, there were inconsistencies in the quality of the roofing.

“The 1970s-era homes performed better than some of the post-2002 new building code homes because of the sealed roof deck,” Leslie Chapman-Henderson, president of the Federal Alliance for Safe Homes, told The Miami Herald. “It was a nominal cost (to reinforce the roof) and a simple thing to do, but it made a huge difference.”

Now, with a renewed focus on metal sheet roofs—which bear the brunt of storms more resiliently than asphalt shingle roofs—FEMA’s data could drastically change the way in which homes are built, and how insurers are responding to fraudulent claims.

Insurance scams set progress back

Insurers are forced to raise the price of coverage in hurricane-prone areas in Florida because of a rash of schemes to deliberately damage roofs to qualify them for insurance claims, a persisting trend.

“Fraud drives insurance rates up and harms all Florida policyholders,” Citizens Property Insurance CEO Tim Cerio said. Still, implementing the changes suggested by the FEMA study may help alleviate some of the concerns posed by insurers—and help homeowners.

“When you’re looking at a home and evaluating its ability to survive a hurricane, the health of the roof is the first question to ask,” said Chapman-Henderson. “It not only increases your performance in the hurricane itself, but in the current environment it can help save you money on your insurance.”

Learn More:

Lawsuits Threaten to Swell Hurricane Ian’s Pricetag

Triple-I Issues Brief: Hurricanes

Catastrophes, Disaster Resilience, Insurers and the Economy, Regulation, Risk Management

Federal “Reinsurance” Proposal Raises Red Flags

January 21, 2024 Jeff Dunsavage Leave a comment

By Sean Kevelighan, Triple-I CEO

Legislation proposed by U.S. Rep. Adam Schiff (D-Calif.) to create a federal “catastrophe reinsurance program” raises several concerns that warrant scrutiny and discussion – starting with the question: Does what’s being proposed even qualify as insurance?

If enacted into law, the bill would establish a “catastrophic property loss reinsurance program…to provide reinsurance for qualifying primary insurance companies.” To qualify, insurers would have to offer:

An all-perils property insurance policy for residential and commercial property, and
A loss-prevention partnership with the policyholder to encourage investments and activities that reduce insured and economic losses from a catastrophe peril.

The proposed program would phase in coverage requirements peril by peril over several years and discontinue FEMA’s National Flood Insurance Program (NFIP). It would set coverage thresholds and dictate rating factors based on input from a board in which the insurance industry is only nominally represented.

And nowhere in the 22-page proposal do any of the following words or phrases appear:

“Actuarial soundness”;
“Risk-based pricing”;
“Reserves”; or
“Policyholder surplus”.

Actuarially sound risk-based pricing and the need to maintain adequate reserves and policyholder surplus to ensure financial strength and claims-paying ability are the bedrock of any insurance program worthy of the name – not technical fine print to be worked out down the road while existing mechanisms are being dismantled and market forces distorted through government involvement.

Insurance is a complicated discipline, and prior federal attempts at providing coverage have struggled to balance their goal of increasing availability and reducing premiums against the need to base underwriting and pricing on actuarially sound principles to ensure sufficient reserves for paying claims.

Actuarially sound risk-based pricing and the need to maintain adequate reserves and policyholder surplus…are the bedrock of any insurance program worthy of the name – not technical fine print to be worked out down the road…
Sean Kevelighan, CEO, Triple-I

Learn from history

NFIP is a strong case in point. Created in 1968 to protect property owners for a peril that most private insurers were reluctant to cover, NFIP’s “one-size-fits-all” approach to underwriting and pricing has led to the program now owing more than $20 billion to the U.S. Treasury because it lacked the reserves to fully pay claims after major events like Hurricane Katrina and Superstorm Sandy. It also often led to lower-risk property owners unfairly subsidizing coverage for higher-risk properties.

Having thus learned the importance of risk-based pricing, NFIP has changed its underwriting and pricing methodology. The new approach – Risk Rating 2.0, announced in 2019 and fully implemented as of April 1, 2023 – more equitably distributes premiums based on home value and individual properties’ flood risk. As a result, premiums of previously subsidized policyholders – particularly in coastal areas with higher values – have risen, leading to outcries from many higher-risk owners who have seen their subsidies reduced.

In addition to leading to fairer pricing, Risk Rating 2.0 – by reducing market distortions – increases incentives for private insurers to get involved. For a long time, private insurers considered flood an untouchable peril, but improved data modeling and analytical tools have increased their comfort writing this business. As the charts below show, private insurers have been playing a steadily increasing role in recent years, covering a larger percentage of a growing risk pool.

Over time, this trend should lead to greater availability and affordability of flood insurance coverage.

Rather than incorporating the lessons generated by NFIP’s experience with a single peril, Rep. Schiff’s proposal would discontinue the reformed flood insurance program while adding a new layer of complexity to coverage across all perils and casting into question the future of various state insurance programs and residual market mechanisms currently in place.

Time-tested principles

Any attempt by the federal government to address insurance availability and affordability concerns must be made with an understanding of how insurance works – from pricing and underwriting to reserving and claim settlement. For example, the Schiff bill proposes piloting an all-perils policy with a term of five years. There are good reasons for property/casualty policies to be written with a one-year term. Specifically, the conditions that affect claims costs can change quickly, and insurers – as referenced above – must set aside sufficient reserves to be able to pay all legitimate claims. If they cannot revisit pricing annually, the financial results could be disastrous.

“Who would have thought in 2019 that replacement costs would increase 55 percent within three years?” asked Dale Porfilio, Triple-I’s chief insurance officer. Supply-chain disruptions related to the COVID-19 pandemic and Russia’s invasion of Ukraine contributed to just such a replacement-cost spike. “Requiring five-year terms for policies would have led to a massive drain on policyholder surplus.”

Policyholder surplus is the financial cushion representing the difference between an insurer’s assets and its liabilities.

In announcing his proposed legislation, Rep. Schiff said it is intended to “insulate consumers from unrestrained cost increases by offering insurers a transparent, fairly priced public reinsurance alternative for the worst climate-driven catastrophes.”

This language ignores the fact that, under state-by-state regulation, premium rate increases are anything but “unrestrained” and ratemaking is based on actuarially sound principles that are transparent and fair. Property/casualty insurance already is one of the most heavily regulated industries in the United States.

Consumers deserve real solutions

Policyholders have legitimate concerns about affordability and, in some cases, availability of insurance. These concerns can create pressure for political leaders at both the state and federal levels to advance measures that are perceived as promising to help. Unfortunately, many recent proposals begin by mischaracterizing current trends as an “insurance crisis,” as opposed to what they really represent: A risk crisis.

Insurance premium rates tend to move in line with the frequency and severity of the perils they cover. They also are affected by factors like fraud and litigation abuse; climate, population, and development trends; and global economics and geopolitics. That is why insurers hire actuaries and data scientists and employ cutting-edge modeling technology to ensure that insurance pricing is actuarially sound, fair, and compliant with regulatory requirements in all states in which they do business.

That is how insurers keep lower-risk policyholders from unfairly subsidizing higher-risk ones.

To its credit, the federal government is working to reduce climate-related risks and investing in resilience through programs like Community Disaster Resilience Zones (CDRZ) and FEMA’s Building Resilient Infrastructure and Communities (BRIC) program. The Bipartisan Infrastructure Law contains substantial funding to promote climate resilience. These are worthy endeavors aimed at addressing risks that drive up insurance costs.

But history has shown that direct government involvement in the underwriting and pricing of insurance products tends not to end well. Any plan that would attempt to micromanage insurers’ coverage of all perils through a lens that ignores time-tested, actuarially sound risk-based pricing principles raises a host of red flags that must be discussed and addressed before such a plan is allowed to become law.

Learn More:

It’s Not an “Insurance Crisis” — It’s a Risk Crisis

Miami-Dade, Fla., Sees Flood Insurance Rate Cuts, Thanks to Resilience Investment

Illinois Bill Highlights Need for Education on Risk-Based Pricing of Insurance

Education Can Overcome Doubts on Credit-Based Insurance Scores, IRC Survey Suggests

Matching Price to Peril Helps Keep Insurance Available and Affordable

Policyholder Surplus Matters: Here’s Why

Triple-I Issues Brief: Flood

Triple-I Issues Brief: Proposition 103 and California’s Risk Crisis

Triple-I Issues Brief: Risk-based Pricing of Insurance

Triple-I Issues Brief: How Inflation Affects P/C Insurance Pricing – and How It Doesn’t

Triple-I Issues Brief: Race and Insurance Pricing

Disaster Resilience, Floods

Milwaukee District Eyes Expanding Nature-Based Flood-Mitigation Plan

December 14, 2023 Jeff Dunsavage Leave a comment

The Milwaukee Metropolitan Sewerage District (MMSD) is mitigating flood risks using reforestation, wetlands restoration, and other nature-based solutions. MMSD has developed a roadmap for scaling up the project. Triple-I – in an analysis requested by the district – has determined such an effort would increase resilience across all the metrics it considered.

In a recent report – A Blueprint to Scale Up Urban Reforestation and Wetland Restoration in Underserved Communities Across the Greater Milwaukee Area – MMSD outlines its plan for the next decade, which includes:

Planting 6 million trees;
Restoring 4,000 acres of wetlands;
Capturing an estimated 350 million gallons of stormwater with trees; and
Storing up to an estimated 1.5 million gallons of floodwater in every acre of wetland.

The report included Triple-I’s analysis, based on its Community Resilience Ratings’ quantitative methodology. Triple-I also stressed the benefits of community-based catastrophe insurance programs incorporating parametric insurance – policies that pay out a fixed dollar amount, no matter the property damage incurred – for mitigating flood risks.

“Community-based programs can incorporate a combination of parametric insurance and traditional indemnity coverage,” the report stated. “Unlike indemnity insurance, parametric structures cover risks without the complications of sending adjusters to assess damage after an event. Instead of paying for damage that has occurred, parametric insurance pays out if certain agreed-upon conditions are met. If coverage is triggered, a payment is made.”

MMSD serves 28 communities in the Greater Milwaukee area and has already committed substantial resources to reforestation, wetlands restoration, and other nature-based solutions, including green stormwater infrastructure projects.

“This commitment has positioned MMSD to build upon its past work to implement integrated nature-based solutions for stormwater management on a large scale,” the report says. “To keep up with growing flood risk, MMSD has committed to investing $294 million in watercourse and flood management projects over the next ten years…. This is a substantial increase and will likely require MMSD to find new ways to generate funding to pay for these projects.”

The report outlines avenues that include federal and state funding sources, as well as public-private partnerships and instruments like environmental impact bonds (EIB) that can help cities pay for innovative projects where traditional sources of financing may be harder to access. EIBs use private capital for investments in environmental projects and are repaid based on the project’s success in achieving its goals.

Catastrophes, Disaster Preparedness, Disaster Resilience, Homeowners Insurance, Risk Management

Despite High-Profile Events, U.S. Wildfire Severity, Frequency
Have Been Declining

December 12, 2023 Jeff Dunsavage Leave a comment

With record-breaking wildfires making headlines in recent years, it may be surprising to learn that U.S. wildfire frequency and severity for in 2023 are on track to be the lowest in the past two decades. In fact, the trend has been generally downward since 2000, according to a recently published Triple-I Issues Brief.

Despite catastrophic losses in Washington State, Hawaii, Louisiana, and elsewhere, California – a state often considered synonymous with wildfire – is in the midst of its second mild fire season in a row. This may be due to drought-breaking rains and snows, but Texas is experiencing fewer wildfires than in 2022, despite worsening drought conditions. About 37 percent of the continental U.S. remains under some form of drought, according to the U.S. Drought Monitor.

At the same time, Swiss Re reports that wildfire’s share of insured natural catastrophe losses has doubled over the past 30 years. How can those trends be reconciled? At least part of the answer resides in population trends – specifically, growing numbers of people choosing to live in the wildland-urban interface (WUI), the zone between unoccupied and developed land, where structures and human activity intermingle with vegetative fuels.

Mitigation is necessary – but not sufficient

The improvements in frequency and severity are likely due to investments in mitigation. State and local authorities have invested heavily to mitigate the human causes of wildfire. In addition, the federal Infrastructure and Jobs Act of 2021 included billions to support wildfire-risk reduction, homeowner investment in mitigation, and improved responsiveness to fires. More recently, the Biden Administration announced $185 million for wildfire mitigation and resilience as part of the Investing in America Agenda, which should help continue the declines in frequency and severity.

But with more people living in the WUI – nearly 99 million, or one third of the U.S. population, according to the U.S. Fire Administration – more than 46 million homes with an estimated value of $1.3 trillion are at risk.

According to the 2022 Annual Report of Wildfires produced by the National Interagency Fire Center (NIFC), 68,988 wildfires were reported and 7.5 million acres burned in 2022. Of these fires, 89 percent were caused by human activity and burned 55 acres per fire. By contrast, the 11 percent of fires caused by lightning resulted in an average of 563 acres burned, 10 times more than human-caused fires.

This difference may shed light on why the number of fires has been decreasing more dramatically than acres burned. Further, population shifts into the WUI are increasing the proximity of property to places prone to fire, helping to explain the rise in wildfire’s increased percentage of insured losses.

Catastrophes, Coastal Property, Disaster Preparedness, Disaster Resilience, ESG, Floods, Homeowners Insurance, Risk Management

CSAA: When It Comes
to Fighting Climate Risk, We’re All On the Same Side

December 6, 2023 Jeff Dunsavage Leave a comment

By Max Dorfman, Research Writer, Triple-I

CSAA Insurance Group – a AAA insurer – is spurring innovation in the insurance industry through several initiatives tackling the dangers of climate risk.

“We’ve been on a journey to reduce our environmental footprint for a long time,” said Debbie Brackeen, Chief Strategy & Innovation Officer with CSAA, in a recent executive exchange with Triple-I CEO Sean Kevelighan. “We are seeking to reduce our carbon footprint by 50 percent by 2025. We view this work as aligned with our mission: to help our members prepare for and recover from climate risk.”

CSAA has taken several steps to help achieve its goals, including:

Leading the first-ever Innovation Challenge on climate resilience with IDEO and Aon, along with several other sponsors;
Working on the California Innovation Fund in partnership with Blue Forest, a $50 million fund that CSAA contributed half that capital, focused on forest restoration and reducing fuel in a smart and sustainable way; and
Supporting the Wildfire Interdisciplinary Research Center at San Jose State University, which conducts work around predictive modeling, among other endeavors.

While this may seem like a new development, Kevelighan noted that insurers have long worked toward these goals.

“We’ve seen the ESG movement take a hold in the past few years, but it’s been in the DNA of the Triple-I and the insurance industry generally for a long time,” Kevelighan said. “More than half the battle is recognizing that the risk is increasing, while identifying solutions.”

Still, with the increasing consequences associated with climate risk, more work needs to be done.

“There were billion-dollar wildfire losses at CSAA in my first two years in the industry,” Brackeen said. “I wondered if this was normal. It ignited in me that, whatever we do in innovation, it will have to do with wildfire risk. However, what concerns me the most is that risks are becoming uninsurable. This is from the cumulative effects of several different types of losses, including convective storms.”

“We have to seek different types of innovative partnerships to address these issues,” Brackeen concluded. “In this fight for our industry, there are no competitors. We have to be on the same side of the table.”

Catastrophes, Disaster Preparedness, Disaster Resilience, Earthquakes, Emerging Risks, ESG, Flood Insurance, Floods, Insurers and the Economy, Legal Environment, Regulation, Risk Management

Triple-I Town Hall Amplified Calls
to Attack Climate Risk

December 4, 2023 Jeff Dunsavage Leave a comment

By Jeff Dunsavage, Senior Research Analyst, Triple-I

I’m pleased and proud to have been part of Triple-I’s Town Hall — “Attacking the Risk Crisis” — in Washington, D.C. In an intimate setting at the Mayflower Hotel on November 30, 120-plus attendees got to hear from experts representing insurance, government, academia, nonprofits, and other stakeholder groups on climate risk, what’s being done to address it, and what remains to be done.

Triple-I’s first-ever Town Hall was designed as a logical step in its multi-disciplinary, action-oriented effort to change behavior to drive resilience. Capping a year in which headlines about “insurance crises” in several states garnered major media attention, Triple-I and its members and partners recognized the need for clarification.

“What we’re seeing is not an ‘insurance crisis’,” Triple-I CEO Sean Kevelighan told the standing-room-only audience. “We’re in the midst of a risk crisis. Rising insurance premium rates and availability difficulties are not the cause but a symptom of this crisis.”

**Whisker Labs CEO Bob Marshall discusses innovation with moderator Jennifer Kyung, Vice President and Chief Underwriter at USAA.**

While the insurance industry has a critical role to play and is uniquely well equipped to lead the attack, simply transferring risk is not enough. A recurring theme at the Town Hall was the need to shift from a focus on assessing and repairing damage to one of predicting and preventing losses.

Three moderated discussions – examining the nature of climate risk and its costs; highlighting the need of strategic innovation in mitigating those risks and building resilience; and exploring the role and impact of government policy – gave panelists the opportunity to share their insights with a diverse audience focused on collaborative action.

The agenda was:

Climate Risk Is Spiraling: What Can Be Done?

Moderator: David Wessel, Senior Fellow and Director at the Brookings Institution and former Economics Editor for The Wall Street Journal.

Panelists:

Dr. Philip Klotzbach, Colorado State University, researcher and Triple-I non-resident scholar.

Dan Kaniewski, Managing Director, Public Sector at Marsh McLennan, Former FEMA Deputy Administrator.

Jacqueline Higgins, Head, North America & Senior Vice President, Public Sector Solutions, Swiss Re

Jim Boccher, Chief Development Officer, ServiceMaster.

Jeff Huebner, Chief Risk Officer, CSAA.

Innovation, High- and Low-Tech: How Insurers Are Driving Solutions

Moderator: Jennifer Kyung, VP, Chief Underwriter, USAA.

Panelists:

Partha Srinivasa, EVP, CIO, Erie Insurance.

Sam Krishnamurthy, CTO, Digital Solutions, Crawford.

Bob Marshall, CEO, Whisker Labs.

Stephen DiCenso, Principal,Milliman.

Charlie Sidoti, Executive Director, InnSure.

Outdated Regs to Legal System Abuse: It Will Take Villages to Fix This

Moderator: Zach Warmbrodt, financial services editor, Politico.

Panelists:

Parr Schoolman, SVP and Chief Risk Officer, Allstate.

Tim Judge, SVP, Head Modeler, Chief Climate Officer, Fannie Mae.

Dan Coates, Deputy Director, DRS, Federal Housing Finance Agency.

Fred Karlinsky, Co-Chair of Greenberg Traurig’s Global Insurance Regulatory & Transactions Practice Group.

Panelists and participants alike appreciated the compact, action-focused, conversational nature of the single-afternoon event, as well as the opportunity to discuss areas in which their diverse industry- or sector-specific priorities and efforts overlapped.

If you weren’t able to join us in Washington, don’t worry. In his closing remarks, Kevelighan announced plans to take the program on the road with a local and regional focus, so stay tuned. You can contact us if you’re interested in participating in future Town Halls or other Triple-I events. You also can join the “Attacking the Risk Crisis” LinkedIn Group to be part of the ongoing conversation.

Disaster Resilience, Industry Awards & Events

Triple-I Town Hall, Nov. 30, in D.C., Targets Climate Risk

November 8, 2023 Jeff Dunsavage Leave a comment

Property/casualty insurers have a powerful interest in mitigating climate-related risk and promoting investment in resilience. The industry is uniquely qualified to help address these perils, but traditional risk-transfer mechanisms on their own are no longer sufficient. Collective responsibility and a multi-disciplinary approach are needed for predicting and preventing catastrophic losses.

That’s why Triple-I’s first-ever “Attacking the Risk Crisis” Town Hall is focused on climate-related perils. The one-day event – being held on November 30, 2023, at the Mayflower Hotel in Washington D.C. – will feature three moderated discussions among private-sector innovators, government, academia, and other stakeholder groups whose engagement is necessary to drive resilience investment and behavioral change.

“Climate risk alone is a formidable adversary,” said Triple-I CEO Sean Kevelighan, noting that insured losses related to natural disasters have increased tenfold since the 1980s. “Resource constraints, legal system abuse, economic pressures, and political intricacies further complicate matters.”

Triple-I has long been a participant in the climate-risk conversation, and this Town Hall is part of its effort help turn these discussion into action. It recently played a key role in a project with the National Institute of Building Sciences (NIBS) to develop a roadmap for stakeholders in flood-risk management to drive investment in mitigation and resilience.

Learn more about the NIBS project here.

In the same spirit as the NIBS project, Triple-I is holding this Town Hall to reach across the barriers that often separate sectors that would benefit from investing in resilience to different degrees and in different stages of the value-creation chain.

“Aligning incentives for these diverse co-beneficiaries of resilience investment is a key hurdle to be cleared,” Kevelighan said. “Triple-I’s subject-matter experts have been speaking and publishing on these topics for years. But our industry can’t do it alone.”

The first panel – Climate Risk Is Spiraling – What Can Be Done? – will be moderated by David Wessel, senior fellow in Economic Studies at the Brookings Institution and director of the Hutchins Center on Fiscal and Monetary Policy. This panel will discuss the current state of climate risk and share their insights as practitioners and thought leaders.

The second – Innovation, High- and Low-Tech: How Insurers Are Driving Solutions – will be moderated by Jennifer Kyung, vice president and chief underwriter for USAA, and focus on how the tools, techniques, and strategies insurers are bringing to bear on these complex and costly challenges.

And the third – From Outdated Regs to Legal System Abuse: It Will Take Villages to Fix This – will be moderated by Zach Warmbrodt, financial services editor at Politico, and panelists will delve into the legal and public policy considerations that need to be addressed to move the needle on climate resilience.

Solution-focused and organized with an eye toward driving positive action across stakeholder groups, this event is an opportunity to meet and interact with people who are doing the work and developing the strategies and tactics. Hear and share insights and – perhaps most important – get involved in the attack on the risk crisis.

You can register and check out the agenda and speaker profiles here.

Disaster Resilience, Floods

Attacking the Risk Crisis: Roadmap to Investment
in Flood Resilience

September 28, 2023 Jeff Dunsavage Leave a comment

As part of its attack on the risk crisis, Triple-I recently participated in a project led by the National Institute of Building Sciences (NIBS) to develop a roadmap for mitigation investment incentives. The Resilience Incentivization Roadmap 2.0 builds off research NIBS published in 2019 and focuses on urban pluvial flooding, though many of the principles can be applied to riverine and coastal flooding, as well as non-flood perils.

The roadmap draws heavily from voluntary programs that have seen success in the context of other risks – such as the Insurance Institute for Business & Home Safety (IBHS) FORTIFIED Home™ Standard and the California Earthquake Authority’s Brace + Bolt retrofit program.

“Pluvial urban flooding” refers to rainwater that can’t flow downhill fast enough to reach streams and stormwater systems and therefore backs up into buildings. Much of the inland flooding caused by Hurricane Ida (2021), Hurricane Ian (2022), and more recent flooding in California due to “atmospheric rivers” and in the Northeast would fall under this category. Common low-cost measures exist to protect buildings from such flooding, and the relative ease and affordability of such mitigations made pluvial urban flooding an appropriate initial target.

This project was a collaboration representing stakeholders in the built environment – lenders, developers, insurers, engineers, agencies, policymakers – with the goal of helping communities develop layered mitigation investment packages. Triple-I’s role was to represent the property/casualty insurance industry as a stakeholder and co-beneficiary of investment in advance mitigation and resilience.

Insurers have strong incentives to encourage policyholders to make improvements that reduce the risk of costly claims. In the case of flood risk – an increasingly expensive peril outside FEMA-designated flood zones – encouraging such improvements is preceded by a different challenge: persuading homeowners to obtain flood insurance.

About 90 percent of U.S. natural disasters involve flooding. Estimates of size of the “flood protection gap” vary widely among experts, but illustrations worth noting include:

Less than 25 percent of buildings inundated by Hurricanes Harvey, Sandy, and Irma had flood coverage;
Inland areas hardest hit by the remnants of Hurricane Ida in 2021 were in areas in which less than 2 percent of properties had federal flood insurance;
In 2022, historic flooding in and around Yellowstone National Park affected areas in which only 3 percent of residents have federal flood insurance; and
More recently, precipitation from atmospheric rivers affecting the U.S. West Coast has resulted in an unparalleled weather event not experienced in several decades, with much of the activity affecting areas with low flood-insurance purchase rates.

For decades, U.S. insurers considered flood risk “untouchable” because of how hard it is to quantify their risk. As a result, flood is excluded under standard homeowners and renters policies, but coverage is available from FEMA’s National Flood Insurance Program (NFIP) and a growing number of private insurers that have gained confidence in recent years in their ability to underwrite this risk using sophisticated risk modeling.

Consumer research has consistently shown that some of the most common reasons for not buying flood insurance include:

An erroneous belief that flood risk is covered under standard homeowners insurance;
If the mortgage lender doesn’t require flood insurance, it must not be necessary; and
The coverage is too expensive.

The roadmap provides findings and specific recommendations developed by its multidisciplinary team of authors in collaboration with broad and diverse participation of stakeholder group members. The NIBS Committee on Finance, Insurance, and Real Estate (CFIRE) will host a webinar on October 18 to go over these findings and recommendations. In addition, CFIRE chair Dan Kaniewski will be a participant in Triple-I’s November 30 Town Hall: Attacking the Risk Crisis in Washington, D.C.

Learn More:

Triple-I “State of the Risk” Issues Brief: Flood

Shutdown Threat Looms Over U.S. Flood Insurance

FEMA Incentive Program Helps Communities Reduce Flood Insurance Rates for Their Citizens

More Private Insurers Writing Flood Coverage; Consumer Demand Continues to Lag

NAIC Seeks Granular Data From Insurers to Help Fill Local Protection Gaps

Kentucky Flood Woes Highlight Inland Protection Gap

Inland Flooding Adds a Wrinkle to Protection Gap

Disaster Resilience

How Proposition 103 Worsens Risk Crisis
In California

September 21, 2023 Jeff Dunsavage Leave a comment

California is not the only U.S. state struggling with insurance availability and affordability, but — as described in a new Triple-I Issues Brief — its problems are exacerbated by a three-decades-old legislative measure that severely constrains insurers’ ability to profitably insure property in the state.

Instead of letting insurers use the most current data and advanced modeling technologies to inform pricing, Proposition 103 requires them to price coverage based on historical data alone. It also bars insurers from incorporating the cost of reinsurance into their prices.

Insurers’ underwriting profitability is measured using a “combined ratio” that represents the difference between claims and expenses insurers pay and the premiums they collect. A ratio below 100 represents an underwriting profit, and one above 100 represents a loss.

As the chart shows, insurers have earned healthy underwriting profits on their homeowners business in all but two of the 10 years between 2013 and 2022. However, the claims and expenses paid in 2017 and 2018 – due largely to wildfire-related losses – were so extreme that the average combined ratio for the period was 108.1.

Underwriting profitability matters because that is where the money comes from to maintain “policyholder surplus” – the funds insurers set aside to ensure that they can pay future claims. Integral to maintaining policyholder surplus is risk-based pricing, which means aligning underwriting and pricing with the cost of the risk being covered. Insurers hire teams of actuaries and data scientists to make sure pricing is tightly aligned with risk, and state regulators and lawmakers closely scrutinize insurers to make sure pricing is fair to policyholders.

To accurately underwrite and price coverage, insurers must be able to set premium rates prospectively. As shown above, one or two years that include major catastrophes can wipe out several years of underwriting profits – thereby contributing to the depletion of policyholder surplus if rates are not raised.

California is a large and potentially profitable market in which insurers want to do business, but current loss trends and the constraints of Proposition 103 have caused several to reassess their appetite for writing coverage in the state. Wildfire losses, combined with events like early 2023’s anomalous rains and, more recently, Hurricane Hilary, increase the urgency for California to continue investing in risk reduction and resilience. The state also needs to update its regulatory regime to remove impediments to underwriting.

An effort in the state legislature to rectify some of the issues making California less attractive to insurers failed in September 2023. With fewer private insurance options available, more Californians are resorting to the state’s FAIR plan, which offers less coverage for a higher premium.

Want to know more about the risk crisis and how insurers are working to address it? Check out Triple-I’s upcoming Town Hall, “Attacking the Risk Crisis,” which will be held Nov. 30 in Washington, D.C.

Cyber Risk, Disaster Resilience, Earthquakes, Floods, Highway Safety, Insurers and the Economy, Terrorism Risk

It’s Not an “Insurance Crisis” — It’s a Risk Crisis

September 20, 2023 Jeff Dunsavage Leave a comment

Ten states – Louisiana, Florida, Idaho, Kentucky, Mississippi, Montana, North Dakota, South Carolina, Texas, and Virginia – as well as additional plaintiffs, are suing the Federal Emergency Management Agency (FEMA) over its new methodology for pricing flood insurance, Risk Rating 2.0. On Sept. 14, a federal hearing lasted six hours as the plaintiffs sought a preliminary injunction to halt the new pricing regime while the lawsuit plays out.

Many residents of these states are understandably upset about seeing their flood insurance premium rates rise under the new approach. There may not be much comfort for them in knowing that the current system is much fairer than the previous one, in which higher-risk homeowners subsidized those with lower risks. Similarly, policyholders who have had their premium rates reduced under Risk Rating 2.0 are unlikely to take to the streets in celebration.

These homeowners aren’t alone in seeing insurance rates rise – or even having to struggle to obtain insurance. And these difficulties aren’t confined to holders of flood insurance policies. Florida and California are two states in which insurers have been forced to rethink their risk appetite – due in part to rising natural catastrophe losses and in part to regulatory and litigation environments that make it increasingly difficult for insurers to profitably write coverage.

Even before the COVID-19 pandemic and Russia’s invasion of Ukraine – and the supply-chain and inflationary pressures they created – the property/casualty insurance market was hardening as insurers adjusted their pricing and their risk appetites to keep pace with conditions that were driving losses up and eroding underwriting profitability – topics Triple-I has written about extensively (see a partial list below).

“Rising insurance rates are not the problem,” says Dale Porfilio, chief insurance officer at Triple-I. “They are a symptom of rising losses related to a range of factors, from climate and population trends to post-pandemic driving behaviors and surging cybercrime to antiquated policies, outdated building codes, fraud, and legal system abuse.”

In short, we are not experiencing an “insurance crisis,” as many media outlets tend to describe the current state of the market; we are experiencing a risk crisis. And even as the states referenced above push back against much-needed flood insurance reform, legislators in several states have been pushing measures that would restrict insurers’ ability to price coverage accurately and fairly – rather than addressing the underlying perils and forces aggravating them.

Triple-I, its members, and a range of partners are working to educate stakeholders and decisionmakers and promote pre-emptive risk mitigation and investment in resilience. We are using our position as thought leaders and our unique non-lobbying role in the insurance industry to reach across sector boundaries and drive constructive action. You will be hearing more about these efforts over the next few months.

The success of these efforts will require a collective understanding among stakeholders and decisionmakers that for insurance to be available and affordable frequency and severity of risk must be measurably reduced. This will require highly focused, integrated projects and programs – many of them at the community level – in which all stakeholders (co-beneficiaries of these efforts) will share responsibility.