Beyond the familiar names Harvey, Irma, Sandy, Katrina, and Andrew, natural catastrophes are more often remembered by the tolls they take—in lost lives, damaged properties, and communities left struggling to recover. With dozens of casualties and some estimates for property losses exceeding $65 billion, Hurricane Harvey has made an enduring mark on Texas and Louisiana that is likely to remain for years to come. Meanwhile, Irma destroyed at least 25 percent of structures in the Florida Keys. In an event of similar intensity just five years ago, Superstorm Sandy dealt a blow to the coastlines of New York, New Jersey, and Connecticut. In its wake, Sandy left 159 deaths and at least $65 billion in damages, according to media reports.
After every storm recedes, questions surface about how better to prepare for catastrophes—and how to respond more rapidly in their aftermaths. This preparation/response concept has become known as resilience. With disaster costs seeming to spiral out of control and global weather becoming more volatile, it may be that the time for resilience is overdue. In seeking a solution, insurers, emergency managers, and government leaders are taking a closer look at reforms to flood insurance and building codes as well as state-of-the-art weather and catastrophe modeling.
Rebounding From Floods
Hurricanes typically result in violent storm surges that can flood residences and businesses. Following Sandy’s surge and other recent events, there have been increased calls for private market flood insurance alternatives to the National Flood Insurance Program (NFIP). Although the NFIP provides coverage for both residential buildings and personal property—for example, up to $250,000 for a structure of one to four families and $100,000 for its contents—that coverage has certain limitations and may not address other exposures that policyholders can face. NFIP policy exclusions preclude coverage for, among other things, personal property located in basements (the area of a structure most susceptible to flooding), temporary living expenses, and damage outside the home (such as septic systems, wells, retaining walls, and decks). The NFIP policy may also limit coverage for costs to comply with revised building ordinances.
The NFIP, which has been providing flood insurance for nearly half a century, is now more than $25 billion in debt, primarily due to large payouts from Katrina and Sandy. With the NFIP up for reauthorization this year in December, Congress and others are hoping to see the program reformed and the private flood insurance market revitalized.
Hurricanes such as Harvey strongly support why private industry should be providing flood insurance as part of a potential solution. At its core, private insurance generally is designed to cover certain losses from specific catastrophic events for policyholders, such as a fire. Regarding flood, many residents at risk may not have NFIP coverage, or indeed any coverage, at levels adequate to offset their losses. As such, many stakeholders, including consumers, industries, and municipalities, are at risk of sustaining great financial hardship from such events, and they may likely want more insurance options to help better protect them with respect to these types of events. That is why many insurers and emergency managers are looking at new ways to help protect against known loss exposures or to mitigate exposures through insurance.
Ultimately, the effects from Harvey may accomplish a few things in the insurance marketplace. For one, there is likely to be an increased interest from consumers for new insurance solutions available to help mitigate financial losses during an extreme event. From a regulatory perspective, Congress may look to further encourage the availability of private market flood insurance as they discuss the NFIP reauthorization. On the commercial insurance side, many insurers likely will be looking for relevant analytics to help with accumulation management and overall risk acceptability metrics.
Modeling for Disaster
In moving toward resilience, insurers, emergency managers, and government officials may benefit from a forecast of the future. In nearly any given community, advanced computer models can offer views into scenarios for different perils—the major ones might include wind, flood, earthquake, and wildfire. Such models can give them a basic understanding of potential losses that they could or are likely to experience. Oftentimes, modeling for perils becomes a wake-up call.
In terms of forecasting the impact of weather, for a city prone to inland flooding, insurers and planners might want to run an inland flood model that could help estimate potential losses for certain areas. Often, it’s prudent to run models for other perils as well. In terms of mitigation and preparation, such information can change the resilience conversation significantly.
If, as some scientists are saying, larger and more severe storms become the “new normal,” then insurers, emergency planners, and others will need better and more accurate predictive models to help plan for the effects of such change. Most scientific research on the influence of climate change vis-à-vis hurricane activity has focused on the relationship between warm Atlantic Ocean conditions and tropical activity in the basin.
But what insurers and reinsurers may really want to understand is how climate change will likely affect the risk of U.S. hurricane landfalls. Results from general circulation models are finally reaching a resolution where storms are occurring with nearly the right frequency and intensity, but long-term simulations are still very time-consuming to run. Extracting insight from the historical record is challenging given the large interannual variability, which makes it difficult to identify impacts from climate change.
Certain data show that when the Atlantic is warm, basinwide hurricane frequency is, on average, elevated. Can an understanding of the physics and thermodynamics of hurricanes be coupled with research into the effects of warm ocean conditions and years with anomalously warm sea surface temperatures? If we assume that history portends the future and that the Atlantic will continue to warm, then we also can assume that basinwide hurricane activity will increase. Yet, we still haven’t answered the question regarding how landfalls will change. That’s the high-level thinking among some cutting-edge modelers.
Another path toward resilience involves reducing property damage caused by storms, fires, and other perils. Certain construction techniques and building materials can increase the hazard to a building and make it less resilient in the event of a catastrophe. Some types of lightweight construction use less material and are economically efficient. But from a fire protection perspective, when these materials burn, they may be more likely to collapse. Commonly used plastic insulation materials, for example, are combustible and can burn quickly. Under certain conditions, the installation of photovoltaic (solar) panels on a roof can increase the potential for damage from wind uplift, magnify the fire risk, and inhibit firefighting operations. Quality of building codes and related enforcement are key considerations that can affect the likelihood and consequences of these perils.
But what about the specific threat of related events—what can we do to limit loss of life and property damage? That response begins with a better understanding of everyday conditions that can rapidly become significant hazards. For example, when winds pose a danger, one of the first places we should look is up. Significant wind damage occurs when the building envelope is breached, and the roof is the most vulnerable structural component.
One example would be unsecured mechanical equipment on a roof. During inspections of homes and commercial buildings, some have encountered heavy equipment secured only with screws into wood blocks. That’s a potential hazard because unsecured equipment can blow off a roof and cause property damage, injuries, or worse. Hurricane-force winds can push improperly secured equipment across the roof surface, tearing into the membrane and compromising the integrity of the building envelope. Insurers should encourage property owners to ensure that rooftop equipment is properly secured before anticipated wind events.
Some also find roofs with degradation that should never have occurred. Property owners need to have building maintenance personnel adopt and implement preventive maintenance and roof inspection programs that alert them to potential and active degradation. Weak links such as roof detachment, corrosion, or other damage could tear off roofing during an enhanced wind event. Such risks need to be mitigated before an event occurs.
After a significant wind event, sometimes we can see massive pieces of a building on the ground and tremendous damage to a roof covered only by a flimsy tarp. Building management should repair or address roof and building envelope problems before the insurer underwrites the policy. Property owners must handle such exposures in anticipation of potential enhanced wind events—well in advance of any last-minute television reports.
Can lessons from past disasters be applied to improve our performance in the future? One major lesson from Sandy involved the effects of storm surge. The fact is that the surge pushed past the immediate coastline and caused extensive damage inland.
Before Sandy, many insurers generally did an efficient job evaluating commercial structures for the peril of fire, but wind was often another matter. Some insurers have started to take a more careful look at wind in areas with greater potential for exposure. Anticipation of perils is the foundation that supports resilience, although anticipation by itself isn’t enough for success. The larger part of the answer lies elsewhere. Do we have the will to change and better prepare for perils—to become more resilient?