Increasingly costly storms: using insurance as an adaptive strategy

 

As reparations continue from the second most costly storm in the US – Hurricane Sandy - murmurs are afoot among politicians and taxpayers alike about the ways the US National Flood Insurance Program will adapt. In four of the past eight years, claims out have eclipsed premiums going in, creating financial challenges for the program. In 2005, Hurricanes Katrina, Rita and Wilma totaled $17.7 billion alone. In July, the Program took a very small step to adapt to this changing reality. The Program now requires increased premiums for vacation homeowners and those with multiple claims living in higher-risk areas.

 

However, many argue, this change to the Program does not go far enough to curb building, and in the case of reparation - rebuilding, in high-risk zones. Pay outs to homeowners living in high risk areas such as hurricane flight paths, along flood-prone rivers, and now on low-lying coastlines in the era of sea level rise pay a tiny share into the Program while receiving the lion’s share of pay outs to rebuild in the same high-risk area. Of course, it is difficult terrain to navigate when dealing with people’s homes and sense of place. However, given the premium to debt ratio, it may serve the Program to make some more fundamental adaptations, such as integrating projections for sea level rise and more frequent storm events into its flood-risk mapping, and phasing in a premium structure that induces a ‘buyer beware’ clause to curb new development in high risk zones and provide realistic retreat options for homeowners with regular inundation and multiple claims. One only has to look at this photo of the recent devastation along the Atlantic coastline to understand why premiums need to reflect both current and projected flood risk realities; houses built on sand are high-risk, both for repeated inundation and on an increasingly stressed national insurance program.