Tag Archives: Disaster Resilience

Federal Reserve’s Randal K. Quarles and the I.I.I.’s Sean Kevelighan talk resilience – financial and otherwise

 

By Lucian McMahon

“It’s a mistake to try and think of resilience from the point of view of trying to predict what can happen and then to respond to a predicted event, because you won’t know what’s going to happen,” said vice chairman for supervision and member of the Board of Governors, Federal Reserve System Randal K. Quarles at the Insurance Information Institute’s (I.I.I.) 2019 Joint Industry Forum. “The important thing is to ensure that you have measures in effect […] that promote resiliency no matter what might happen.”

Left to right: Sean Kevelighan and Randal Quarles

Resilience is more than prevention

In his conversation with the I.I.I. CEO Sean Kevelighan, Quarles stressed that financial stability depends on resilience, the ability to absorb system shocks no matter their source. “Wherever the shock might come from, it’s important that the institution or system is resilient to shock,” he said.

Cyberrisk is a perfect example. Quarles noted that a lot of the discussion around cyberrisks is about prevention. But he argued that prevention is only one part of cyberrisk resilience. “A key element to resilience is to assume that something will happen, and then determine how you have constructed a system that can stand back up, withstand, and respond to that shock.”

The U.S. economy appears to remain resilient during recent events

Quarles noted that the data on the real economy remains strong. Job creation continues. There’s been an uptick in the labor force participation. The economy is growing without unconstrained inflation.

But what about the recent stock market fluctuations and the ominous financial news coming out of Europe and Asia? “I think recently financial markets have been reacting to a few things,” Quarles said. “Mostly it’s doubt in the strength of continuing global growth. Some of the data that’s come out of China and Europe would suggest a little bit of less growth in the near term.”

Nonetheless, Quarles pointed out that markets might be more attuned to downside risks. He is confident that the core fundamentals of the economy remain strong. “The fundamental fact is that the financial sector is much more highly capitalized, has more liquidity, than it had before the crisis. Our assessment of risk to stability in the current environment is moderate.”

Quarles acknowledged that certain global events (particularly recent threats to trade openness) could impact the financial sector. The Fed, however, is alert to it. Quarles remains optimistic. “The hope is that a lot of these current events, current issues, will be way stations on the way to a more stable, more politically-supported open economy. It’s in everyone’s long term interest.”

In other words, the hope is that the economy is more resilient to shocks than it had been in the past.

The “Sand Palace”: A Poster-Child for Resilience

You probably remember the “Sand Palace,” the lone house standing after Hurricane Michael made landfall in the Florida panhandle in October.

It’s a powerful story about one man’s stand against nature’s destructive power. But the Sand Palace is also a story about insurance.

There are generally two aspects of insurance. One is to pay out claims to make people whole again after a loss. Another is to incentivize behavior that makes those losses less likely to happen. In insurance-speak, we call that “mitigation.”

Consider the Sand Palace in that context. According to an AIR Worldwide analysis, the house was built to be even more resilient than Florida’s already-stringent building codes: reinforced concrete, limited windows, minimal space below the roof to prevent uplift, a first floor 15 feet above ground, and more.

AIR analyzed how this construction fared during the hurricane. The structure’s features reduced wind losses by about 90 percent compared to other homes. Plus, the height of the building significantly reduced any storm surge damage.

This led AIR to conclude that “the Sand Palace is an excellent case study of the impact of mitigating features for use in risk reduction.” Presumably, the house also made an excellent risk for an insurer to cover.

It’s fair to ask, though: at what cost resilience? These kinds of reinforcements can cost tens of thousands of dollars, which can be out of reach for many homeowners.

But that’s probably where insurance can play a role. For example, is there a potential for insurers to offer economic incentives or discounts to homeowners to make their houses resistant to hurricane-force floods and winds? This incentive could be particularly effective in a world where climate change events might cause insurers to raise their premiums to account for higher risks. (That’s why many argue that insurance can play a crucial role in helping to combat the effects of climate change.)

It’s not always easy to say where the intersection between the costs and benefits of mitigation is. That’ll be up to the individual insurer and their insureds. But if done right, mitigation can be a win-win strategy. Insurers don’t have to pay out as much money for losses. Consumers don’t have to pay as much for their insurance. And the world can be made a safer, more resilient place.

The need for sustainable and resilient infrastructure: lessons from Puerto Rico

Puerto Rico is still suffering the devastating aftereffects from 2017 hurricanes Irma and Maria. Rebuilding the island will cost up to $50 billion according to a recent statement by FEMA head, William “Brock” Long.  Many residents are still without power and the new hurricane season is just around the corner.

The situation in Puerto Rico is a warning to North America of what could happen If we fail to address our outdated and crumbling infrastructure, according to a new report from Zurich North America.

The report, Rebuilding Infrastructure: The Need for Sustainable and Resilient Solutions, points out that during the years leading up to Hurricane Maria, Puerto Rico’s infrastructure had been in increasing need of routine maintenance. The island’s power grid had fallen into a particular state of disrepair as a result of declining revenues and political corruption.

While the U.S. mainland infrastructure may not be in as bad a shape, the increased frequency and severity of extreme weather events makes the issue of resilient and sustainable building impossible to ignore.

The report stresses the importance of planning to rebuild BEFORE a disaster strikes and of anticipating future needs. On the positive side, over the past few years, use of reinsurance and catastrophe bonds by governments and government agencies have been increasing. Several South and Central American countries have obtained bonds that would pay for damage caused by earthquakes, and FEMA has begun obtaining reinsurance for its National Flood Insurance Program.

Disaster theme parks coming to a city near you?

In Japan, disaster learning centers that allow visitors to experience simulated earthquakes, typhoons and fires are gaining five-star reviews on travel sites like TripAdvisor and providing valuable lessons in preparedness.

The Japan Times reports that earthquake simulators have become major tourist draws at more than 60 disaster education centers nationwide and are attracting growing numbers of foreign visitors.

Some attribute the increased interest in disaster prevention education in Japan to the 2011 Tohoku earthquake and tsunami. Others note that tourists today are more interested in life experiences than shopping.

From The Seattle Times: “Many of the more than 60 centers feature large shake tables where visitors can ride out fake quakes as powerful as the real thing. In some centers, visitors navigate life-size dioramas of crushed cars and teetering power poles while being quizzed on the best response to dangerous situations.”

The emphasis is on personal responsibility and action: how to make your way safely through wreckage and how to find the closest shelter.

So could centers like these form a valuable part of disaster preparation in earthquake-prone parts of the United States?

According to The Seattle Times, civic leaders in Seattle have long wanted to import the concept to quake-prone Western Washington, where many residents have only a vague understanding of the risks.

It quotes Bill Stafford, a retired director of the Trade Development Alliance of Greater Seattle: “If people could experience the visceral jolt of being rattled on a shake table or of picking their way through a recreation of a post-quake Seattle, they might take the risks more seriously.”

Check out I.I.I. facts and statistics on earthquakes.

Working with nature to build resilience to hurricanes

Strong buildings, levees and seawalls play an essential role in increasing resilience to floods and hurricanes, but insurers are also looking to natural infrastructure to mitigate storm losses.

As the 2017 Atlantic hurricane season officially begins, an ongoing effort by insurers, risk modelers, environmental groups and academics is focused on understanding how natural defenses like coastal wetlands and mangrove swamps can reduce the impact of storms.

A 2016 study led by researchers at the University of California, Santa Cruz, the Nature Conservancy and the Wildlife Conservation Society, found that more than $625 million in property losses were prevented during Hurricane Sandy by coastal habitats in the Northeast.

Where wetlands remain, the average damage reduction from Sandy was greater than 10 percent. Researchers expect analysis of the effects of Hurricane Matthew will demonstrate the value of similar protections.

The study was conducted in association with Risk Management Solutions and Guy Carpenter, with funding from the Lloyd’s Tercentenary Research Foundation and additional support from the Science for Nature and People Partnership.

Business Insurance has more on this story here.

This is just one example of how reinsurers and insurers collaborate with different sectors to build resilience and mitigate storm damage.

For example, Swiss Re is working with the Nature Conservancy to explore the economics of nature-based coastal defenses.

I.I.I. CEO Sean Kevelighan writes about how the insurance industry collaborates with different groups to build resilience to natural disasters in this article on PC360.

Check out I.I.I. issues update Climate Change: Insurance Issues.

Insurance Payouts Underpin Disaster Recovery Process

Tens of thousands of policyholders caught in a disaster in 2016 were better able to recover from the losses and hardships inflicted thanks to insurance.

Global insured losses from catastrophes totaled around $54 billion in 2016 – the highest level since 2012, according to the latest report from Swiss Re sigma.

North America accounted for more than half the global insured losses in 2016, with insured losses from disaster events reaching $30 billion, the highest of all regions.

This was due to a record number of severe convective storms in the United States and because the level of insurance penetration for such storm risks in the U.S. is high, sigma noted.

For example, a hailstorm that struck Texas in April 2016 resulted in an economic loss of $3.5 billion, of which $3 billion, or 86 percent, was covered by insurance.

“With insurance, many households and businesses benefited from insurance payouts for the heavy damage to their property caused by large hailstones.”

However, insurance cover is not universal. The shortfall in insurance relative to total economic losses from all disaster events—the protection gap—was $121 billion in 2016. See this chart:

“Under-insurance against catastrophe risk is a reality in both advanced and emerging markets, and there is still large opportunity for the industry to help strengthen worldwide resilience.”

For example, Swiss Re noted that the U.S. has been and continues to be critically underinsured for flood risk, with a flood protection gap of around $10 billion annually.

Additional Insurance Information Institute facts and statistics on global catastrophe losses are available here.

Insurance Helps Break Cycle of Extreme Disasters and Poverty

The human and economic costs of extreme natural disasters on poverty are much greater than previously thought and insurance is one of the resilience-building tools that could help, according to new analysis from the World Bank.

In all of the 117 countries studied, the report finds that the effect of floods, windstorms, earthquakes and tsunamis on well-being, measured in terms of lost consumption, is larger than asset losses.

It estimates the impact of disasters on well-being in these countries is equivalent to global annual consumption losses of $520 billion, and forces 26 million people into poverty each year. This outstrips other estimates by 60 percent.

But resilience-building interventions, including universal early warning systems, improved access to personal banking, insurance policies and social protection systems (like cash transfers and public works programs) could lessen climate shocks.

The report finds that these measures combined would help countries and communities see a gain in well-being equivalent to a $100 billion increase in annual global consumption, and reduce the overall impact of disasters on well-being by 20 percent.

As World Bank Group President Jim Yong Kim, says:

“Severe climate shocks threaten to roll back decades of progress against poverty. Storms, floods, and droughts have dire human and economic consequences, with poor people often paying the heaviest price. Building resilience to disasters not only makes economic sense, it is a moral imperative.”

Efforts to build resilience among poorer communities are already gaining ground, the report shows.

For example, Kenya’s social protection system provided additional resources to vulnerable farmers well before the 2015 drought, helping them prepare for and mitigate its impacts.

And in Pakistan, after record-breaking floods in 2010, the government created a rapid-response cash grant program that supported recovery efforts of an estimated 8 million people.

Check out the Insurance Information Institute issues updates on microinsurance and emerging markets here, and on catastrophes and insurance issues here.