Earlier this year, I wrote about the role mangrove forests and coral reefs play in mitigating tropical storm damage and how insurance might help protect these critical resources. A recent Nature Conservancy study looks specifically at opportunities in mangrove protection and restoration and identifies where insurance could be used to support their resilience benefits.
In many places, mangroves are the first line of defense, their aerial roots helping to reduce erosion and dissipate storm surge. In Florida, one study found, mangroves alone prevented $1.5 billion in direct flood damages and protected over half a million people during Hurricane Irma in 2017, reducing damages by nearly 25% in counties with mangroves. Another study found mangroves actively prevent more than $65 billion in property damage and protect over 15 million people every year worldwide.
Unfortunately, they frequently fall victim to development that creates the greatest potential for storm-related losses.
The Nature Conservancy study describes the implementation of a coral reef insurance product in Quintana Roo, Mexico, and explores how the model could be adapted for mangrove preservation. In Quintana Roo, a trust fund accepts money from public, private and philanthropic sources, as well as a federal fee collected from beachfront property owners who wish to use the beach for commercial purposes. It uses those funds to buy the insurance – a parametric product that is triggered if wind speeds in a designated area exceed 100 knots.
Parametric policies cover risks without the complications of sending adjusters to assess damage after a catastrophe. Instead of paying for damage that has occurred, it pays out if certain agreed-upon conditions are met – for example, a specific wind speed or earthquake magnitude in a particular area. If coverage is triggered, a payment is made, regardless of damage. Speed of payment and reduced administration costs can ease the burden on both insurers and policyholders.
“Unlike coral reefs, however, mangroves do not usually require rapid post-storm interventions in order to survive,” the study says. This means an indemnity insurance policy might be created that delivers payments based on post-catastrophe assessments of mangrove damage. “There are a variety of insurance products available that can be tailored to meet the specific needs of mangroves, with initial payouts made quickly through parametric covers and assessed payouts made through indemnity cover at a later stage.”
Before a mangrove insurance policy can be developed and deployed, a full feasibility study would need to be conducted. The Nature Conservancy report recommends that this include “higher-resolution flood-risk models, estimation of the wind-reduction benefits of mangroves, and the construction of fragility curves to show the relationship between damage to a mangrove forest and some component of a storm event, such as storm surge or wind speed.”
Hurricane Delta is surging closer to the U.S. Gulf Coast and is expected to land on the evening of October 9 somewhere on Louisiana’s southwest coast. Dr. Phil Klotzbach, CSU research scientist and Triple-I non-resident scholar gives an update on Delta in the video clip above.
The hurricane has grown in size since yesterday and a large area of the country will see impacts from the storm. Hurricane warnings are in place from High Island, TX to Morgan City, LA, and storm surge warnings extend from High Island, TX to the mouth of the Pearl River.
In addition to strong winds Delta is expected to bring storm surge as high as 7 to 11 feet along the coast of central LA, rainfall totals are forecast to be from 5 to 10 inches from southwest to central LA, with isolated totals of up to 15 inches.
Delta is on track to hit the same area of Louisiana where Hurricane Laura landed only six weeks ago. New Orleans, which will likely miss the storm, was still preparing for the possibility of tornadoes. Louisiana Gov. John Bel Edwards declared a state of emergency. Mississippi Gov. Tate Reeves also declared a state of emergency, with forecasters saying southern Mississippi could see heavy rain and flash flooding.
The outer bands of Tropical Storm Beta are lashing the Texas coast but official landfall is forecast to be late this evening. Beta is also bringing tropical storm conditions to parts of the southwestern Louisiana coast where 2 to 4 feet of storm surge is possible.
The storm is going to bring heavy rainfall to areas that were hit by Hurricane Laura.
High tide on Tuesday could bring “life-threatening storm surge” in areas of Texas and Louisiana, according to the National Hurricane Center (NHC). “Persons located within these areas should take all necessary actions to protect life and property from rising water and the potential for other dangerous conditions,” NHC said. “Promptly follow evacuation and other instructions from local officials.”
The storm could also create tornadoes near the middle-to-upper Texas coast or the southwestern Louisiana coast, NHC said.
Please click on the links below for Triple-I’s hurricane preparedness guides:
“Any home can flood,” says Dan Kaniewski — managing director for public sector innovation at Marsh & McLennan and former deputy administrator for resilience at the Federal Emergency Management Agency (FEMA). “Even if you’re well outside a floodplain…. Get flood insurance. Whether you’re a homeowner or a renter or a business — get flood insurance.”
Dr. Rick Knabb — on-air hurricane expert for the Weather Channel, speaking at Triple-I’s 2019 Joint Industry Forum — is similarly emphatic.
“If it can rain where you live,” he said, “it can flood where you live.”
Despite such warnings, even in designated flood zones, the protection gap remains large. A McKinsey & Co. analysis of flood insurance purchase rates in areas most affected by three Category 4 hurricanes that made landfall in the United States — Harvey, Irma, and Maria — found that as many as 80 percent of homeowners in Texas, 60 percent in Florida, and 99 percent in Puerto Rico lacked flood insurance.
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 report identified “around 1.7 times the number of properties as having substantial risk,” compared with FEMA’s designation.
“This equates to a total of 14.6 million properties across the country at substantial risk, of which 5.9 million property owners are currently unaware of or underestimating the risk they face,” the foundation says.
A more recent Triple-I analysis, conducted in advance of Hurricane Sally, found that flood insurance purchase rates in the counties most likely to be affected by the storm were “remarkably low.”
“In Taylor County, Ga., for example, just 0.09 percent of properties are insured against flooding,” Triple-I wrote.
NOT covered by homeowners insurance
Flood damage is excluded under standard homeowners and renters insurance policies. However, flood coverage is available as a separate policy from the National Flood Insurance Program (NFIP), administered by FEMA, and from a growing number of private insurers, thanks to sophisticated flood models that have made insurers more comfortable writing this once “untouchable” risk.
Invest in resilience
If it seems as if you’ve heard me beat this drum before, you’re right. I take flood and flood insurance very personally.
After Hurricane Irene flooded my inland New Jersey basement in August 2011, destroying many irreplaceable items, it was my flood insurance that enabled me to have a French drain and two powerful pumps installed that have since kept my historically damp basement bone dry – even during Superstorm Sandy the following year.
Hurricane Sally made landfall this morning near Gulf Shores, Alabama, as a Category 2 storm with sustained winds of 105 mph and higher gusts. The storm threatens extremely heavy rainfall and catastrophic floods for miles. Dr. Philip Klotzbach, Triple-I non-resident scholar and Colorado State University atmospheric scientist, gives an update on the storm in the video above.
Hurricane Sally looks to be a very significant hurricane for the northern Gulf Coast according to Triple-I non-resident scholar and Colorado State University atmospheric scientist Dr. Philip Klotzbach.
While the Category 1 storm doesn’t look to intensify much today given relatively strong wind shear and cooler sea surface temperatures (since the storm is moving very slowly and consequently churning up colder water beneath the surface), we’re likely to have a long duration storm event unfolding over the next several days.
Wind impacts will be moderate, but the storm will be moving very slowly, so a prolonged period of high winds can be expected. The very slow-moving hurricane is going produce tremendous amounts of rain along the northern Gulf Coast. Large regions will likely experience 10+” of rainfall, with isolated storm totals approaching 30″, said Dr. Klotzbach.
Emergency declarations for parts of Florida, Louisiana, Mississippi and Alabama have been issued and residents are urged to listen to local officials.
Perhaps the most emotionally compelling data point invoked by those who would compel insurers – through litigation and legislation – to pay business-interruption claims explicitly excluded from the policies they wrote is the property/casualty insurance industry’s nearly $800 billion policyholder surplus.
Many Americans hear “surplus” and think of a bit of cash they have stashed away for emergencies. And when you consider that nearly 40 percent of Americans surveyed by the Federal Reserve said they would either have to borrow or sell something to cover an unexpected $400 expense – or couldn’t pay it at all – that number may sound like overkill.
Not as much as you think
But policyholder surplus isn’t a “rainy day fund.” It’s an essential part of the industry’s ability to keep the promises it makes to policyholders. And although a number like $800 billion may raise eyebrows, when we look more closely at its components, the amount available to cover claims turns out to be considerably less.
Insurers are regulated on a state-by-state basis. Regulators require them to hold a certain amount in reserve to pay claims based on each insurer’s own risk profile. The aggregation of these reserves – required by every state for every insurer doing business in those states – accounts for about half the oft-cited industry surplus.
Call it $400 billion, for simplicity’s sake.
Each company’s regulator-required surplus can be thought of as that company’s “running on empty” mark – the point at which alarms go off and regulators start talking about requiring it to set even more aside to make sure no policyholders are left in a lurch.
By extension, $400 billion is where alarms begin going off for the entire industry.
It gets worse – or better, depending on your perspective.
In addition to state regulators’ requirements, the private rating agencies that gauge insurers’ financial strength and claims-paying ability don’t want to see reserves get anywhere near “Empty.” To get a strong rating from A.M. Best, Fitch, S&P, or Moody’s, insurers have to keep even more in reserve.
Why do private agency ratings matter? Consumers and businesses use them to determine what insurer they’ll buy coverage from. Also, stronger ratings can contribute to lower borrowing expenses, which can help keep insurers’ operating costs – and, in turn, policyholders’ premiums – at reasonable levels.
So, let’s say these additional reserves amount to about $200 billion for the industry. The nearly $800 billion surplus we started with now falls to about $200 billion.
To cover claims by all personal and commercial policyholders in a given year without prompting regulatory and rating agency actions that could drive up insurers’ costs and policyholders’ premiums.
Which brings us to today.
Losses ordinary and extraordinary
In the first quarter of 2020, the industry experienced its largest-ever quarterly decline in surplus, to $771.9 billion. This decline was due, in large part, to declines in stock value related to the economic recession sparked by the coronavirus pandemic.
Insured losses from this year’s Hurricane Isaias are estimated in the vicinity of $5 billion. Hurricane Laura’s losses could, by some estimates, be as “small” as $4 billion or as large as $13 billion.
And the Atlantic hurricane season has not yet peaked.
The 2020 wildfire season is off to a horrific start. From January 1 to September 8, 2020, there were 41,051 wildfires, compared with 35,386 in the same period in 2019, according to the National Interagency Fire Center. About 4.7 million acres were burned in the 2020 period, compared with 4.2 million acres in 2019.
In California alone, wildfires have already burned 2.2 million acres in 2020 — more than any year on record. For context, insured losses for California’s November 2018 fires were estimated at more than $11 billion.
And the 2020 wildfire season still has a way to go.
All this is on top of routine claims for property and casualty losses.
Four billion here, 11 billion there – pretty soon we’re talking about “real money,” against available reserves that are far smaller than they at first appear.
No end in sight
Oh, yeah – and the pandemic-fueled recession isn’t expected to reverse any time soon. Economic growth worldwide remains depressed, with nearly every country experiencing declines in gross domestic product (GDP) – the total value of goods and services produced. GDP growth for the world’s 10 largest insurance markets is expected to decrease by 6.99 percent in 2020, compared to Triple-I’s previous estimate of a 4.9 percent decrease.
If insurers were required to pay business-interruption claims they never agreed to cover – and, therefore, didn’t reserve for – the cost to the industry related to small businesses alone could be as high as $383 billion per month.
This would bankrupt the industry, leaving many policyholders uninsured and insurance itself an untenable business proposition.
Fortunately, Americans seem to be beginning to get this. A recent poll by Future of American Insurance and Reinsurance (FAIR) found the majority of Americans believe the federal government should bear the financial responsibility for helping businesses stay afloat during the coronavirus pandemic. Only 16 percent of respondents said insurers should bear the responsibility, and only 8 percent said they believe lawsuits against insurers are the best path for businesses to secure financial relief.
Hurricane Hanna, 2020’s first Atlantic basin hurricane, made landfall during the late afternoon of Saturday July 25 as a Category 1 storm on the Corpus Christi, Texas, coast. It struck Padre Island with winds of 90 mph.
The Corpus Christi area dodged the hurricane’s heavier rain bands, but the storm still caused significant flooding and damage. Thousands were without power late July 26 as crews worked overtime to make repairs and Texas Governor Greg Abbott issued an emergency declaration for 32 counties.
By Sunday evening, the storm was downgraded to a tropical depression, with maximum sustained winds of 35 mph, and was slowly dying over the mountains of northern Mexico.
CoreLogic, a real estate data analytics provider, estimated that over 14,000 homes are at risk from Hurricane Hanna’s storm surge.
Flood damage to a home, a renter’s possessions, or a business is generally covered under FEMA National Flood Insurance Program (NFIP) policies, if the homeowner, renter, or business has purchased one. Several private insurers also offer flood insurance.
Hurricanes and storm-related flooding are responsible for the bulk of damage from disasters in the United States, accounting for annual economic losses of about $54 billion, according to the Congressional Budget Office (CBO).
These losses have been on the rise, due, in large part, to increased coastal development. More, bigger homes, more valuables inside them, more cars and infrastructure – these all can contribute to bigger losses. The CBO estimates that a combination of private insurance for wind damage, federal flood insurance, and federal disaster assistance would cover about 50 percent of losses to the residential sector and 40 percent of commercial sector losses.
Recent research illustrates the benefits provided by mangroves, barrier islands, and coral reefs – natural features that frequently fall victim to development – in terms of limiting storm damage. In many places, mangroves are the first line of defense, their aerial roots helping to reduce erosion and dissipate storm surge. A healthy coral reef can reduce up to 97 percent of a wave’s energy before it hits the shore. Reefs — especially those that have been weakened by pollution, disease, overfishing, and ocean acidification — can be damaged by severe storms, reducing the protection they offer for coastal communities.
In Florida, a recent study found, mangroves alone prevented $1.5 billion in direct flood damages and protected over half a million people during Hurricane Irma in 2017, reducing damages by nearly 25% in counties with mangroves. Another study found that mangroves actively prevent more than $65 billion in property damage and protect over 15 million people every year worldwide.
A separate study quantified the global flood-prevention benefits of coral reefs at $4.3 billion.
Such estimates invite debate, but even if these endangered systems provided a fraction of the loss prevention estimated, wouldn’t you think coastal communities and the insurance industry would be investing in protecting them?
Well, they’re beginning to.
The Mexican state of Quintana Roo has partnered with hotel owners, the Nature Conservancy, and the National Parks Commission to pilot a conservation strategy that involves coral reef insurance. The insurance component – a one-year parametric policy – pays out if wind speeds in excess of 100 knots hit a predefined area. Unlike traditional insurance, which pays for damage if it occurs, parametric insurance pays claims when specific conditions are met – regardless of whether damage is incurred. Without the need for claims adjustment, policyholders quickly get their benefit and can begin their recovery. In the case of the coral reef coverage, the swift payout will allow for quick damage assessments, debris removal, and initial repairs to be carried out.
Similar approaches could be applied to protecting mangroves, commercial fish stocks that can be harmed by overfishing or habitat loss, or other intrinsically valuable assets that are hard to insure with traditional approaches.
On June 29 the First Street Foundation, a nonprofit research firm, released an analysis of flood risk which shows that nearly 6 million of the nation’s properties are at more substantial risk of flooding than indicated by the Federal Emergency Management Agency’s (FEMA) maps.
FEMA replied with a statement that its maps are intended for floodplain management and decisions about emergency responses and that its flood insurance risk maps do not conflict with First Street’s maps since the two complement one another by showing different types of risk.
To help explain how flood maps work, Dr. Michel Léonard, Vice President & Senior Economist, Triple-I, wrote the following post.
Flood maps are used to identify and communicate a property’s exposure to flood.
Flood maps rank exposure from lowest to highest by categorizing an area into a set of standardized flood zones, with each zone assigned its own flood exposure level. Flood exposure is normally expressed as a percentage representing flood frequency and/or severity over a specific number of years. This approach is similar to maps for other natural perils.
The most commonly used flood map is FEMA’s nationwide flood map. There are also several high-quality flood maps from academia, non-profits and businesses, each providing added perspectives. These maps aren’t meant to be better than one another but rather, together, to provide a fuller understanding of the risks caused by floods to homeowners, businesses, and communities.
First Street’s flood map is an example of such maps: scientific, credible, and insightful in its contribution to the discussion about current and changing flood exposure. Its main insight, that flood risk and exposure may be higher than currently implied by FEMA’s or other maps, is not a controversial statement but rather adds to the growing consensus across flood experts that flood risk is increasing in frequency and severity nationwide as a result of extreme weather events. FEMA recommends reviewing its own flood map every year due to exposure changing over time.
The main takeaway from flood maps for consumers and businesses is learning about their own relative exposure vis-à-vis other locations. Homeowners and businesses should use flood maps to better understand their current exposure and determine, for example, whether their property insurance is adequate or considering preemptive risk mitigation.
Homeowners and businesses thinking about moving should look at these maps before deciding about where to go. Will they be more or less exposed to flood? How will the new location’s flood exposure impact their mortgage, their insurance costs?
That said, while all flood maps provide insight into flood exposure, FEMA’s flood map remains different from others. As a government provided flood map, it is a countrywide benchmark for flood risk identification and quantification. It is used by different levels of government, regulators, first responders and insurance companies. For example, homeowners and businesses should know that a property’s location within a specific FEMA flood map zone is the sole benchmark for mortgage lenders requiring flood insurance in order to get a mortgage.