Coastal Risk Management
Insurance exposures within coastal communities are rising from climate change and development. Increasing populations and property values, higher sea levels and more violent weather are all working to threaten insured property and challenge property insurers. The insurance industry response has been focused on financing the aggregation of coastal exposure in a manner that does not risk insurer solvency. Most of the political response has been focused on affordable insurance options, and one such result, which nobody in the insurance industry believes is effective or reasonable, is Citizens in Florida (see here & here).
Very little attention has been paid to risk management and the impact a risk management approach can have on adverse outcomes. Both pre-loss and post-loss risk management tactics are critical components of successfully financing risk, yet there is little will within the industry or political segments to promote risk management.
A recent paper by The Heinz Center and Ceres has brought a group of diverse organizations (sponsors) together to generally agree on an approach to address the coastal threat that includes a heavy emphasis on risk management (see here, and here for the entire report). Some key points:
Over half the U.S. population lives in coastal counties and almost half of the nation’s gross domestic product – $4.5 trillion – is generated in those counties and in adjacent ocean waters. Further, insured property values along the Gulf and Atlantic coasts have been roughly doubling every decade.
Wharton has demonstrated that homeowners in Florida could reduce losses from a severe hurricane by 61 percent, resulting in $51 billion in savings, simply by building to strong construction codes. Putting this in perspective, the same cost reductions applied to Katrina damages would have reduced the $41.1 billion worth of insured property losses to about $16.1 billion. Similarly, the National Institute of Building Sciences showed that every dollar spent on mitigation saves society about four dollars on recovery costs. Despite this evidence, nearly all U.S. coastal cities and towns lack adequate land use requirements and building code standards to realize these savings.
Five hundred commercial clients of the insurer, FM Global, experienced approximately 85 percent less damage from Hurricane Katrina as similarly situated properties. This significant reduction in the amount of damage was directly attributable to hurricane loss prevention and preparedness measures taken by these policyholders. The return on investment is striking – a $2.5 million investment in loss prevention resulted in $500 million in avoided losses.
While risk management will not eliminate the exposure, it can go a long way towards making the cost of insurance reasonable.
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