Losses from the winter storm that swept through the southern United States earlier this year continue to loom large among the concerns of property and casualty insurers, even as the nation contends with wildfires and anticipates yet another above-average hurricane season.
“On its own, Uri would not necessarily impact premium rates,” says Dr. Michel Léonard, CBE, Triple-I vice president and senior economist. “What matters is the overall severity of extreme weather events during a calendar year or a specific peril season.”
Dr. Léonard reports that current expectations among weather experts of higher-than-average hurricane and wildfire seasons – in addition to Uri – will likely contribute to increases in property insurance rates in 2021, “before and regardless of inflation.”
“Traditionally, actuarial models keep natural catastrophe losses and inflation separate and combine them in the last stage of rate estimates,” Léonard says.
Three 2021 trends, he says, add up to put upward significant pressure on insurance rates for 2022:
Combined 2021 natural catastrophe losses from winter storms, hurricanes, and wildfires expected to be above annual averages;
Overall inflation in the U.S. currently forecast to be between 4% and 6% for 2021, the highest in a decade; and
Industry-specific inflation above the national average for construction materials and labor due to COVID-19 supply-chain disruptions.
“There are a few situations in which extreme weather events directly contribute to replacement cost increases, which, in turn, impact rates,” Léonard says. “But ‘price gouging’ – such as happened after Uri – shouldn’t be confused with inflation. It’s temporary, while inflation almost always endures.”
One of the benefits of social media is the fact that it reminds you what was on your mind several years earlier. Today I was reminded of the horrific flooding in Ellicott City, Md., that occurred three years ago this week.
This event resonated for me because I had friends living there, and I lived in a similarly situated flood-prone town. The images from Ellicott City recalled for me the damage much closer to home, in Bound Brook, NJ, when Tropical Storm Floyd dropped over 13 inches of rain and the Raritan River crested at above 42 feet, inundating the downtown and sparking fires as electrical systems shorted out.
My little town of Dunellen had dodged a major bullet, I realized as I watched on TV as firefighters in boats responded to the devastation next door. Our basement, turned temporarily into an indoor swimming pool, seemed a minor inconvenience next to the losses in Bound Brook and elsewhere.
A few years later, my region would be visited by similarly shocking images in the aftermath of Hurricane Irene and Superstorm Sandy.
We’ve written a lot about flood risk, the flood protection gap, and the need for a resilience mindset to prevent damages and loss wherever possible and help families, businesses, and communities bounce back from unavoidable disasters. But sometimes a few images can persuade more eloquently and effectively than all the words in the world.
Florida Governor Ron DeSantis last week signed two bills that lawmakers say will leave Florida better prepared for future flooding and sea level rise.
The legislature’s approval of these measures and the governor putting his signature on them is one of those moments that seem to mark a real change in awareness of and attitude toward this often-minimized risk. As the Tampa Bay Timespoints out, “Florida’s legislature for most of the last decade has taken little action and entertained hardly any public discussion about sea level rise.”
The bills, SB 1954 and SB 2514, will — among other things — set aside hundreds of millions of state dollars for flooding infrastructure projects. It requires the Department of Environmental Protection to prepare a flooding and resiliency plan and provides up to $100 million a year to communities that identify areas along the coast and other waterways that are at risk from sea level rise.
“This is a really significant amount of resources,” DeSantis said at a bill signing ceremony in Tarpon Springs. “We’re really putting our money where our mouth is when it comes to protecting the state of Florida, particularly our coastal communities, from the risks of flooding.”
On the leading edge of sea level rise
Florida’s 1,350 miles of coastline is the lifeblood of its tourism industry. Given the fact that much of the state sits at or near sea level on a foundation largely composed of porous limestone, it is particularly vulnerable to the threat of rising seas. Some areas of the state are already seeing flooding on clear days during particularly high tides, according to the Associated Press.
The magnitude of the threat is illustrated by the fact that three Florida-based insurers recently announced that they will not be renewing more than 53,000 property policies as of June – just as the 2021 Atlantic hurricane season begins. The first named storm of the season — Subtropical Storm Ana — formed early on May 22, northeast of Bermuda.
Florida statute Chapter 224 Part III allows insurers to cancel policies when the company would be placed in a hazardous financial situation due to an uptick in claims after hurricane damage or attorney’s fees to defend itself over fraudulent adjuster claims.
Dulce Suarez-Resnick, past president of the Latin American Association of Insurance Agencies, said this kind of widespread cancellation is common after subsequent years of heightened hurricane activity.
“It’s not the end of the world or that they’re bad companies,” Suarez-Resnick said. “It’s that these companies were weakened by prior storms and the bill for the reinsurance got heftier. That’s where we are today.”
Thanks to the insurance industry’s longtime focus on assessing and quantifying catastrophe risk and the rise of sophisticated modeling capabilities, insurers are ideal partners for addressing these evolving risks.
Caitlin Durkovich, special assistant to President Biden and White House National Security Council senior director of resilience and response, discussed the administration’s climate and resilience priorities at Triple-I’s National Town Hall (highlights video below. Click here to view full event).
She and Paul Huang, acting associate administrator of resilience for the Federal Emergency Management Administration (FEMA), met virtually with Triple-I CEO Sean Kevelighan and Michel Léonard, Triple-I vice president and senior economist.
“Resilience is a very important theme of this administration and of the priorities we have,” Durkovich said, elaborating that this includes preparation for and response to both natural and man-made events. The objective is to learn from every incident “so we don’t just bounce back but bounce forward.”
Referring to the administration’s infrastructure and clean-energy goals, she said, “We’re anticipating what the world is going to look like 20 to 30 years from now, given the life span of our built infrastructure.”
Durkovich noted that there are several longstanding hazard-mitigation and hazard-response programs spread across multiple agencies.
“I think we have the opportunity to bring at least the federal community together to look at some of those programs and think about how we can modernize them, just like we’re modernizing infrastructure,” she said.
This will help communities “build back better” after an event.
But it’s going to take more than federal government to bring this about. Communities will have to be very involved, she said, adding, “It’s not just state and local planners, but it’s infrastructure owners and operators, it’s the finance side of the house, who are needed to work through some of these hard challenges before, so after an emergency, when money becomes available, you’re ready to make some significant changes.”
And as we invest in electrified transportation infrastructure, she said, “we have to make sure that infrastructure is resilient to power outages, to storms, and when we’re in the middle of a mass evacuation it can accommodate hundreds of thousands of people.”
Despite having to think about everything that could go wrong (what she described as “healthy paranoia”), Durkovich was upbeat: “It’s amazing to be having these conversations about designing resilience in at the beginning, instead of bolting it on at the end.”
FEMA’s Paul Huang echoed Durkovich’s enthusiasm for a “whole of government” and “whole of community” approach to resilience.
“We’re going to have to rethink how we do things,” he said. “We have programs that have always been around. They’re good programs, but it’s not enough. We have to think bigger and more creatively.”
Huang talked about a new FEMA program, Building Resilient Infrastructure and Communities (BRIC), that support states, local communities, tribes and territories in developing hazard-mitigation projects, reducing the risks they face from natural disasters. “We’re hoping to see new ideas from industry, working with local and state government, to say, ‘This is something we can try together in partnership to get a bigger bang for our buck.’ “
Half a billion people worldwide are affected by floods annually, and about 90 percent of all U.S. natural disasters involve flooding. The human and economic tolls are massive, and until recently insuring these risks and helping communities recover fell almost entirely on government programs.
Improved data, analysis, and modeling have helped drive private-sector interest in flood-risk transfer and mitigation. But despite growing private involvement, many experts consider the current system unsustainable. A resilience mindset is required, and that demands more than insurance products.
A new Triple-I paper analyzes the current state of flood risk and resilience and discusses how governments, corporations, academia, and others are rising to the challenges and seizing the opportunities.
“New products alone will not close the protection gap,” says Triple-I CEO Sean Kevelighan. “Risk transfer is just one tool in the resilience toolkit. Our understanding of loss trends and expertise in assessing and quantifying risk must be joined at the hip to technology, public policy and finance, and science. We need to partner with communities and businesses at every level to promote a broad resilience mindset focused on pre-emptive mitigation and rapid recovery.”
The Triple-I paper describes how this is happening. Tapping its own resources and the expertise of its insurance and risk-management network, Triple-I is pleased to bring you this analysis of the current state of flood risk and resilience.
Improved access to data, analytical tools, and sophisticated modeling capabilities has turned flood insurance from a virtually untouchable risk for insurers to an area of increasing business opportunity. These developments also have put the pieces in place for powerful collaborations between corporations, governments, and nonprofits to drive flood resilience for communities and businesses.
Stormwater management is one example. Triple-I CEO Sean Kevelighan recently participated in a panel at the P3 Water Summit to discuss flooding and water quality challenges and how insurers, municipalities, rating agencies, and other entities are incorporating flood and climate risks into their businesses.
The view from the middle
“Insurance is in the middle of all of this,” Kevelighan said, referring to three major global crises the moderator had mentioned – biodiversity loss, climate change, and the COVID-19 pandemic – “and I might add geopolitical risk and social unrest, as well as disruption due to technology and innovation. Triple-I is here to inform all those discussions.”
Climate risk, he said, “is certainly on the forefront of all the discussions we’re having right now, in terms of the larger disruption continuum.”
For decades, he noted, the industry has been looking for ways not just to help customers recover from natural catastrophes but to get out in front of the risks and promote methods to make them more resilient.
Flooding is a particularly pressing risk, Kevelighan noted, because “every year you’ve got about a half billion people who are impacted by floods. About 90 percent of all U.S. natural catastrophes involve some form of flooding. This is a critical part of the catastrophe cycle – and one that is significantly underinsured.”
Flood insurance and recovery assistance historically have fallen to federal and state government to manage. But even as improved data and other capabilities have made writing the coverage an increasingly attractive opportunity for insurers, Kevelighan said, it also has become clear that risk transfer through insurance isn’t enough to close the “protection gap.” Public-private partnerships and other approaches are essential.
Bringing it all together
Richard Seline, managing director of Resilient H2O Partners and co-founder of the Resilience Innovation Hub, talked about his companies’ efforts to “introduce emerging technologies, existing equipment, put it together with public and private interests” to promote activities and behaviors supportive of resilience.
“The Innovation Hub is intended to bring together the best ideas, the best experience, the best capital, and network it more efficiently and effectively,” Seline said. “We’re in lots of discussions with engineering firms, architecture firms, a lot of private equity firms. I didn’t know until a year ago that the Nature Conservancy has its own venture fund! Those are the types of folks we’re pulling together.”
Like Kevelighan, Seline pointed to the importance of data in making these collaborations possible: “Unless we have the data available to do the cost-benefit analysis and the return on investment, it’s all theoretical.”
Thanks to partnerships between organizations like Triple-I and Resilient H2O, he said, it’s now possible to marry hydrological data to financial and economic risk models to better inform investment planning and decision making.
Ready to ‘take off’
Stacey Mawson, director at Fitch Ratings, said the environment now seems ripe for stormwater public-private partnerships to “take off.”
“Over the past couple of years we’ve been seeing more projects coming to us for ratings,” she said. These have included water transport, flood mitigation, privatization of utilities because they need additional investment. “We’re seeing an increased focus on water in all its aspects.”
Companies that issue bonds and other forms of debt rely on rating agencies’ assessments of their creditworthiness to keep their borrowing costs low. A bad rating may cause bond buyers to demand a higher interest rate in return for the greater risk such a rating implies.
Rating agencies like Fitch can play a strong role in advancing environmental and social objectives by incorporating climate and social risks into their rating processes. Mawson discussed Fitch’s environmental, social, and governance (ESG) scores and suggested that, over time, if bond-issuing entities aren’t paying sufficient attention to such considerations it could become a rating issue.
Insured losses from March storms in the United States are likely to surpass $1 billion, Aon said in its monthly Global Catastrophe Recap.
Aon said multiple outbreaks – featuring tornadoes, hail, snow, and flooding – were to blame. The most notable included severe weather across the Central and Southern United States, with 122 tornadoes touching down during the month – the most since 2017. Alabama, Mississippi, Texas, Georgia, and Tennessee experienced the most damage.
This followed record-setting winter weather-related insured losses in February, following a prolonged Polar Vortex event, in which Arkansas, Kentucky, Tennessee, and Texas were among the hardest-hit states.
“The Polar Vortex generated record-breaking cold temperatures which extended as far south as the U.S./Mexico border,” Aon said in its February report. “Concurrently, a series of low-pressure systems produced rounds of hazardous snow, sleet, freezing rain, ice, and severe thunderstorms with impacts spanning from Washington state to the Mid-Atlantic.”
Texas was hard hit by the winter weather, which left dozens dead, millions without power, and nearly 15 million with water issues and could wind up being the costliest disaster in state history. Disaster-modeling firm AIR Worldwide says insured losses “appear likely to exceed $10 billion.”
The Electric Reliability Council of Texas (ERCOT) has been widely criticized for failing to require power facilities to be winterized after the last major storm that caused outages in 2011, thus contributing to damage incurred during the more recent one. Last week, the Cincinnati Insurance Company, headquartered in Ohio, filed suit asking a federal court for a declaratory judgment that would allow the insurer to decline paying damages in bodily injury or property damage lawsuits where ERCOT is found to be liable.
If the federal court doesn’t grant the declaratory judgment, Cincinnati Insurance would likely have to cover ERCOT under its current policy contract.
In February and into March, multiple rounds of heavy rainfall and severe weather generated flooding across parts of the Ohio and Tennessee Valleys. Parts of Kentucky, Tennessee, and West Virginia were most affected.
“Impacts were compounded by localized severe weather, including large hail, straight-line winds, and isolated tornadoes,” Aon reported. “Total economic losses were estimated to approach USD 100 million.”
A large portion of the residential flood damage was expected to be uninsured due to low National Flood Insurance Program (NFIP) coverage.
The Federal Emergency Management Agency (FEMA) last week unveiled details of Risk Rating 2.0 – its plan to modernize the National Flood Insurance Program (NFIP) to make it fairer and more sustainable.
The changes measuring flood danger differently – gauging properties’ specific risks and replacement costs, rather than simply whether they sit in a FEMA-designated “flood zone.” FEMA officials said this would end a system in which low-value homes effectively subsidize insurance for high-value homes.
Despite concerns that Risk Rating 2.0 would lead to huge premium increases, NFIP Senior Executive David Maurstad said 23 percent of policyholders will see “immediate decreases,” 66 percent will see an “average of zero to $10 a month” in additional premiums, and 11% will pay higher bills, some more than $20 a month.
NFIP owes the U.S. Treasury $20.5 billion after a series of hurricanes that resulted in claims costs greater than the premiums FEMA received.
“Our current system is just fundamentally not working for us anymore,” Maurstad said, adding that the new approach would result in a “more equitable, accurate and individualized NFIP.”
Lawmakers in coastal states like Florida worried about the sudden impact of higher rates – more accurately reflecting the greater flood risk in those areas – on their constituents. FEMA has ameliorated those concerns by making new rates apply only to new policies when the program takes effect in October 2021. Homeowners and businesses with existing flood policies won’t see a rate change until April 2022.
FEMA said high-value homes in high-risk areas would experience seeing the largest increases. FEMA expects their rate increases would take effect over a 10-15 year “glide path” as they continue to be protected by an 18 percent annual cap on premium increases that is written into law.
The Union of Concerned Scientists (UCS) quickly weighed in on the plan.
“The system we’ve used to calculate flood risk, and in turn insurance policy premiums, no longer holds water,” said Shana Udvardy, a UCS climate resilience analyst. “Outdated maps have left homeowners ill-prepared for possible disasters. Risk Rating 2.0 could go a long way in helping homeowners better understand their risk, ensuring they can make informed decisions to protect themselves and their property.”
“It is great to see that FEMA is moving forward with Risk Rating 2.0, which is so badly needed,” said Matthew Eby, executive director of the First Street Foundation, a climate and technology non-profit that has done its own extensive flood-mapping. A recent First Street analysis found the United States to be woefully underprepared for damaging floods.
It identified “around 1.7 times the number of properties as having substantial risk,” compared with FEMA’s flood zone 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.”
Recent flooding in Kentucky “is going to be one that goes into the record books,” the state’s Emergency Management Director Michael Dossett said in a news conference this week. At least 49 counties had issued disaster declarations following days of rain that dumped four to seven inches across a wide stretch of the state and pushed rivers to levels not seen for decades.
Dossett and Gov. Andy Beshear said the state had been in contact with the Federal Emergency Management Agency (FEMA) to seek federal aid and that assessments would be made next week for both the flooding and an ice storm last week. Damage assessments for the ice storm had been put on hold by the floods.
Extreme weather events, like these floods and last month’s winter storm that left dozens of Texans dead, millions without power, and nearly 15 million with water issues, underscore the importance of resilience planning and of homeowners and businesses having appropriate insurance coverage.
Flood protection gap
About 90 percent of all U.S. natural disasters involve flooding. Whether related to coastal and inland inundations due to hurricanes, extreme rainfall, snowmelt, mudflows, or other events, floods cause billions of dollars in losses each year. According to FEMA, one inch of flood water can cause as much as $25,000 in damage to a home.
But direct economic losses are only part of the picture. Human costs are enormous, and it can take families, businesses, and communities years to recover.
Flood damage is excluded from coverage under standard homeowners and renters insurance policies. However, coverage is available from the National Flood Insurance Program (NFIP) and from a growing number of private insurers.
Many people believe they don’t need flood insurance if the bank providing their mortgage doesn’t require it; others assume their homeowners insurance covers flood damage; others think they cannot afford it.
A recent analysis by the nonprofit First Street Foundation found the United States to be woefully underprepared for damaging floods. It identified “around 1.7 times the number of properties as having substantial risk,” compared with FEMA’s flood zone 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 report said.
Current system unsustainable
The NFIP owes more than $20.5 billion to the U.S. Treasury, leaving $9.9 billion in borrowing authority from a $30.43 billion limit in law. This debt is serviced by the NFIP and interest is paid through premium revenues. With flood losses on the rise, the current system is not sustainable without changes.
In December, FEMA proposed “substantively” revising the “estimated cost of assistance” factor the agency uses to review governors’ requests for a federal disaster declaration to “more accurately assess the disaster response capabilities” of the states, District of Columbia and U.S. territories. Its Risk Rating 2.0 initiative, set for implementation in October, aims to make flood insurance rates more accurately reflect insured properties’ individual flood risk.
In other words, the federal government will likely ask states, municipalities, and some policyholders to shoulder more of the cost of recovering from natural catastrophes.
Complex challenges require multi-pronged approaches to address them, and FEMA and other federal and state agencies are working with the private sector to close the flood protection gap. In the near term, the most cost-effective way for families and businesses to mitigate flood risk is insurance.
If it can rain where you are, it can flood where you are. As Daniel Kaniewski, managing director for public sector innovation at Marsh & McLennan and former deputy administrator for resilience at FEMA, put it during a Triple-I webinar last year: “Any home can flood. Even if you’re well outside a floodplain, get flood insurance. Whether you’re a homeowner or a renter or a businessowner — get flood insurance.”