The Climate Risk No One Is Talking About
Ministers from across the world gathered in Paris over the weekend to hammer out the details of a sweeping climate accord to limit carbon emissions and slow the pace of global warming.
While many are applauding the landmark deal, it will do little to address the financial threat millions of Americans face from increasingly severe flooding. To do so, U.S. policymakers must act to reauthorize the National Flood Insurance Program (“NFIP”) before its expiration in September of 2017.
The NFIP helps to reduce the socio-economic impact of flood disasters by providing homeowners and businesses with up to $250,000 of insurance coverage. In order to ensure that NFIP remains financially viable over time and able to withstand the heightened, climate-induced costs of the modern era, U.S. policymakers should act now to reform it.
Failure to act will leave millions of Americans exposed to financial damages they can ill-afford, potentially creating another obstacle to America’s long-term economic growth. Reform to the NFIP would expand the size of the risk community it covers by increasing the number of residential and commercial policyholders as well as homeowners and businesses at risk of flood. NFIP reform would also share risk with the private sector, and bring modern technology to enhance the program’s administration.
Since its inception in 1968, the National Flood Insurance Program has served as the bedrock of flood insurance coverage in the United States. Today, more than 22,000 communities in all of the 50 states and U.S. territories participate in the NFIP. The program draws on the knowledge of a wide range of experts to structure, price, and administer flood insurance policies, and has historically subsidized a significant portion of its coverage to promote widespread access.
It is difficult to overstate the NFIP’s importance. Floods are the number one natural disaster in the United States affecting thousands of businesses, homeowners, and ordinary citizens every year. A major flood can result in billions of dollars in property damage and business interruption losses. Between 1980 and 2013, floods caused more than $260 billion in damages, according to the U.S. Treasury.
Despite these costs, from 1968 until September 2005, the NFIP was primarily self-funded, covering most of its costs from revenue generated through normal business operations. Since that time, the NFIP’s finances have become increasingly challenged.
Currently, the NFIP does not have the ability to fund catastrophic events through policy premiums. However, such events have become increasingly commonplace. According to the National Hurricane Center, the Atlantic hurricane season in 2005 was one of the most active on record, including hurricanes Katrina, Rita, and Wilma. These three storms caused billions of dollars in losses along the Gulf Coast and the Eastern seaboard, sending the NFIP approximately $19 billion into debt, only $2 billion of which has been repaid.
Excluding the debt from the 2005 storms, the NFIP was self-funded again from 2006 until October 2012. However, Superstorm Sandy in 2012 created an additional $7 billion in debt from insured damages, primarily in New Jersey and New York, resulting in a current $23 billion debt to the US Treasury.
While large financial losses from hurricanes are nothing new, the frequency and intensity of these losses have grown in recent years. What’s equally clear is the NFIP, as currently structured, will not remain financially solvent going forward. Congressional debate on the reauthorization of the NFIP, in the lead-up to its expiration on September 30, 2017, presents an important opportunity to ensure the program’s long-term sustainability and the viability of the U.S. flood insurance market, more generally.
So, what must be done?
First, legislators must increase the size of the NFIP’s risk community. As with any insurance market, having a diverse and large number of policyholders is essential to spreading and balancing risk. The NFIP can help achieve this by better enforcing existing mandatory flood insurance purchase requirements. Lawmakers should encourage mortgage financiers to make certain that homeowners who should have the protection of
NFIP flood coverage actually purchase a policy, which should spread risk in a more balanced way and improve the NFIP’s financial position. Second, Congress must find a way to share NFIP risk with the private sector. Under the current system, the federal government assumes the vast majority of flood risk, including through underwriting this risk, overseeing risk mitigation initiatives, and providing emergency funding to communities in the aftermath of a flood disaster, as it did in the case of Hurricane Katrina.
Greater private participation in flood insurance markets could take many forms, including direct coverage, reinsurance, or jointly underwriting flood risk with the government and other private insurers. But any model that reduces the financial burden the government faces in its near-exclusive underwriting of flood insurance risk would allow it to invest in mitigation activities that could save billions of dollars in damages over time.
Finally, policymakers must bring the NFIP itself into the modern area. The program still uses technologies and business techniques that are outdated and perhaps obsolete. Policy holders often have to pay hundreds of dollars for repeated certification inspections that use outdated capabilities.
Modernizing reforms should replace physical inspections by using data sources like GPS and remote sensing technology, and employ data analytic tools to predict and model floods before they occur. Capitalizing on modern technology and business practices would both reduce the NFIP’s administrative costs and increase revenue by incentivizing more people to participate in the program.
Global leaders are to be applauded for their efforts to identify global solutions. At the same time, policymakers here in the United States must also do their part to provide solutions to protect Americans from the financial damages of severe flooding. Acting now, to jumpstart the process of reforming the NFIP to meet the new risks of our changing world would be a terrific place to start.
Peter Zaffino is president and chief executive officer of Marsh, and chairman of Marsh & McLennan Companies’ Risk & Insurance Services segment.