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Natural disaster resilience requires a united approach

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Insurers, businesses and elected officials should work together to improve community flood resilience across the country, say Mike Foley, CEO of North America commercial and regional chairman of North America for Zurich Insurance Group, and Frank Nutter, president of the Reinsurance Association of America. Both men recently were

invited to the White House to discuss climate resilience.

Looming ominously over the federal budget — its rapid growth fueled by seemingly unstoppable demographic trends — is a threat with projected costs that will exceed the resources of any one community or state. Indeed, it dwarfs the budget for entire branches of the federal government. No, we are not referring to Social Security, Medicare or Medicaid. This grim specter is in fact the cost of aid for natural disasters. It should be discussed in the same breath as the growing liabilities of the country's entitlement programs.

As the world has seen an increase in size and frequency of catastrophic events in the past several years, we should not overlook the potential

financial effects of disaster aid on our nation. Congress appropriated nearly $60 billion alone in disaster aid for Superstorm Sandy — an amount that exceeded the 2012 budget for the Congress, judicial branch and Office of the President combined. The Federal National Flood Insurance Program is some $25 billion in debt stemming from losses primarily related to Hurricane Katrina and Sandy. According to Temple University in Philadelphia, federal expenditures related to disaster relief will be $20 billion a year on average for the next 75 years, with the long-term cost being essentially the same as the unfunded trillions for Social Security.

As insurers, we know firsthand disaster costs are growing: 12 of the 16 most expensive insured catastrophes in the United States have occurred in the last decade. With roughly 200 events in both 2009 and 2010, the value of assets at risk is growing. Insured property values for U.S. coastal exposures now total over $10.6 trillion.

Americans view the dramatic television images of homes, businesses and even entire communities disrupted and destroyed by floods, tornados, hurricanes, and other perils. Many of us have felt the effects directly in our communities, as both the frequency and severity of natural disasters have increased in recent years. When disasters strike, people look to their insurers and governments for financial resources to recover, and of course it's both our business and our obligation to assist. But we can all do more than just provide funds in the aftermath, and given the growing costs, we simply have to do more. Disaster cannot be entirely averted, but the costs in lives and dollars can be reduced, through better information and better decision-making about the risks of moving into harm's way.

The human and socioeconomic costs of extreme weather events are growing at an accelerating rate, in large part because we are building and moving into the riskiest areas, such as cities and coastal areas. For example, half of the world's population now lives in cities, up from one-fifth 100 years ago — a proportion that is set to rise, further concentrating risk. And exposures are cross-subsidized by certain public policies. For example, the National Oceanic and Atmospheric Administration estimates that 49 million households, or 39% of the U.S. population, now lives in coastal counties — the areas of greatest risk for many disasters — with 1,355 building permits issued in these areas every day.

We need to be smarter about development by building safer and stronger. Risk prevention is a far more cost-effective solution than just spending on recovery. For example, floods affect more people globally than any other risk, and cost benefit analysis studies show that for every dollar spent on selected flood risk reduction measures, an average of five dollars is saved through avoided and reduced losses.

Global networks of academics, scientists, and other experts from non-governmental organizations, government agencies and the business community are collaborating in a global program designed to advance knowledge, develop robust expertise and design strategies that can be implemented to help communities strengthen their resilience to flood risks. Initial research and field work in this emerging field has affected thousands of families and businesses in the developing world. But to scale this up so that we promote community flood resilience across the United States will require intense collaboration with government at the federal, state and municipal levels.

Working together, the insurance industry and government can promote insurance programs and policies that encourage prevention and mitigation. Under a directive within his administration's climate action plan, President Barack Obama has launched an initiative to bring together the expertise and resources of the federal government and the private insurance industry to reduce risks and costs of extreme weather events and climate-related events.

Policymakers at every level need to turn this initiative into opportunities for their own communities to build a more resilient future. The considerations over how best to protect a community can be complex, involving many stakeholders with very different priorities. Insurers can play a key role in this process by helping people quantify the risks they face. The fundamental functions of insurance — underwriting, risk engineering, claims management, and asset management — are some of the greatest economic tools we have to encourage individuals, businesses and communities to understand, prepare for and mitigate risks.

For its part, government must play an integral role in sourcing data, implementing a decision process and enforcing standards. Building a system capable of compensating for dynamic variables at the community level across the country in a meaningful way will not be easy. It will require political will, public support, funding, and time. But it's the right thing to do, and it's the right thing to do now.

Mike Foley is CEO of North America commercial and regional chairman of North America for Zurich Insurance Group Ltd. Frank Nutter is president of the Reinsurance Association of America. Mr. Foley can be reached at mike.foley@zurichna.com and 847-605-8753. Mr. Nutter can be reached at nutter@reinsurance.org and 202-783-8314.