Insuring Against the Inevitable
Hurricane Ian renews some perennial questions about recovering from natural disasters.
WaPo (“Florida’s insurance woes could make Ian’s economic wrath even worse“):
he economic devastation left behind by Hurricane Ian in Florida is likely to put further pressure on the state’s fragile insurance system.
About a dozen firms that provide homeowners insurance in Florida have become insolvent in the past two years, according to the Florida Office of Insurance Regulation, leaving hundreds of thousands of property owners scrambling for coverage. Many Florida homeowners in flood-prone areas don’t carry flood insurance, the Federal Emergency Management Agency has said — despite the fact that many policies don’t cover flood damage.
And as insurers assess the impact of the storm and assess future risk as extreme weather events grow more common, coverage could get pushed even more out of reach for Floridians.
“Obviously this is going to be a multibillion-dollar storm, and with the insurance industry already crumbling, this is going to be devastating,” said state Sen. Jeff Brandes, a Republican.
A Fitch Ratings analysis Thursday estimated insured cost losses could be from $25 billion to $40 billion in the state. Brandes estimated that only around 20 percent of residents in the areas under evacuation orders have federal flood insurance and many others don’t have adequate property insurance given the scale of the destruction.
A unique confluence of factors makes Florida an exceptionally difficult place for private insurers to do business, and for homeowners to find affordable comprehensive plans from private companies. As Ian has shown, the state is susceptible to dangerous weather events, something that’s likely to increase over time because of climate change. Insurance companies’ risk models, which incorporate thousands of years of weather data, have proved unreliable when it comes to the most recent storms, said Danielle Lombardo, chair of the Global Real Estate Practice at Lockton, an independent insurance brokerage and consultancy.
“It is the most risky piece of land in the world for insurers from a catastrophe standpoint,” Lombardo said.
Lawmakers and industry officials said Ian could doom private homeowner insurers unless the state legislature steps in, while consumer advocates said residents faced getting completely priced out of the market.
More than 400,000 Florida consumers have lost coverage already this year due to failed insurers or policy increases, according to Mark Friedlander, corporate communications director for the Insurance Information Institute, a research and communications nonprofit for the industry.
Already, some consumers “are now in a position where they are having to attempt to try to locate new coverage, and they just simply aren’t able to find any insurance company that is willing to write them,” said Tasha Carter, Florida’s insurance consumer advocate.
Florida’s laws regarding insurance litigation tend to favor plaintiffs, according to industry officials and independent experts, so that insurance companies are constantly dealing with a barrage of lawsuits. According to the state’s Office of Insurance Regulation, Florida accounted for 76 percent of all homeowners lawsuits nationwide in 2021.
NYT (“Hurricane Ian’s Toll Is Severe. Lack of Insurance Will Make It Worse.“):
Most of the Florida homes in the path of Hurricane Ian lack flood insurance, posing a major challenge to rebuilding efforts, new data show.
In the counties whose residents were told to evacuate, just 18.5 percent of homes have coverage through the National Flood Insurance Program, according to Milliman, an actuarial firm that works with the program.
Within those counties, homes inside the government-designated floodplain, the area most exposed to flooding, 47.3 percent of homes have flood insurance, Milliman found. In areas outside the floodplain — many of which are still likely to have been damaged by rain or storm surge from Ian — only an estimated 9.4 percent of homes have flood coverage.
The small share of households with flood insurance demonstrates the challenges posed by the country’s approach to rebuilding after disasters — a mix of public and private funding that is under strain as climate change makes those disasters more frequent and severe.
If people can’t pay to rebuild their homes after disasters, the financial toll of climate change for households and communities could become ruinous.
Regular homeowners’ insurance policies typically don’t pay for damage caused by flooding, which is why the Federal Emergency Management Agency offers flood insurance. The coverage is expensive, with average premiums close to $1,000 a year, according to data from Forbes. But without it, homeowners hit by flooding are left to rely on either savings, loans or charity to rebuild.
The low takeup rates for federal flood insurance in the areas hit by Hurricane Ian mean it will take longer for those communities to rebuild, imperiling their economies and prolonging the suffering, experts said.
“These people, many of them believe that their homeowners’ insurance policy will cover them,” said Nancy Watkins, principal and consulting actuary at Milliman. “Or they might think that federal disaster aid is going to swoop in and make them whole.”
Humans have lived near the water since our origins. Initially, it was a matter of survival: access to food and water. Eventually, it became about commerce: a means of transporting people and goods. It’s still all of those things, of course, but also something primordial: people are just drawn to the rivers and seas. Even a lake will do.
Flooding has always been an associated risk but it’s one that has increased in magnitude as our lives have gotten more modern. We build massive structures that are very expensive to rebuild or repair. And, yes, climate change has increased the frequency of severe events.
Regardless, events like Ian refocus our attention on the questions of Who should bear the financial cost of these events? And should we rebuild in flood plains and the paths of hurricanes at all?
There’s no easy answer to either of these questions.
We have a flood insurance system funded through the Federal government but, as noted in the reports above, they’re rather expensive and most folks either don’t know they exist or don’t participate. It’s expensive to insure against flooding and challenging to weigh the risks. And, it turns out, flood insurance doesn’t come close to making you whole even if you’ve paid for it.
It’s easy to say that those folks made their choices and should have to live with them. But they’re not all yacht owners who’ve lost their beach house; most of them are living paycheck to paycheck and happen to live in places where hurricanes and tropical storms are a fact of life.
The federal taxpayer often steps in to help but it’s on a seemingly random basis, depending on the whims of Congress. Back to the NYT report:
FEMA offers some limited emergency assistance to homeowners without insurance, such as paying for temporary housing in a hotel, motel or mobile home, or making basic repairs to make a house habitable.
But FEMA typically won’t pay to rebuild homes, as The New York Times reported in July. Aid is limited to less than $40,000 — a fraction of what it costs to rebuild.
Congress can decide to provide extra money for disaster survivors, usually by giving funding to the U.S. Department of Housing and Urban Development, which can then set up what it calls Disaster Recovery grants to states. States can then use that money to pay for rebuilding homes.
But Congress has no guidelines for determining which disasters merit that extra funding and whether it provides the funding depends as much on the political clout of a state’s congressional delegation as on the actual level of damage. Even when Congress makes extra money available, it often takes years before that funding reaches homeowners.
Disaster survivors who lack insurance, but who can’t wait years in the hope of aid, can apply for help from the Small Business Administration, another federal agency that plays a role in disaster recovery. The agency loans to renters, homeowners, businesses and nonprofit organizations. But those loans must be repaid — what amounts to a new mortgage, which can be challenging for disaster survivors.
The fallback option for storm victims is to look for help from charities. But as disasters multiply, and as the economy slows, those charities are being stretched thin, with no guarantee that they’ll be able to help all those who need them.
I suppose that’s why they call these things “disasters.” But they’re common enough that we should have figured out how to deal with them more efficiently by now.
The related question that comes up is What level of risk is worth bearing? How close to the water should we be building or rebuilding, let alone subsidizing with tax dollars?
To some degree, living right on the water is a luxury good. There are more people who want to do it than there is land by the water. It may be that we should rethink the risks and build that into our zoning and construction codes.