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The costliest year for natural disasters on record is placing new attention on the importance of mitigating future disaster risks, with compelling data highlighting how investments in predisaster mitigation can save money in the long term.
The insurance sector has a particularly critical role to play in disaster mitigation efforts, including by incentivizing the building of new infrastructure to more resilient standards or retrofitting existing infrastructure to withstand catastrophic perils, experts say.
The National Institute of Building Sciences found that the cost benefits of investing in disaster mitigation were even higher than previously estimated, with every dollar invested saving the United States $6 in future costs compared with the $4 return in avoided losses cited in a 2005 study. The report, released in January, examined 23 years of federally funded mitigation grants provided by the Federal Emergency Management Agency, the U.S. Economic Development Administration and the U.S. Department of Housing and Urban Development.
“I have to say bravo to NIBS for putting a punctuation point on the value of mitigation,” said Julie Rochman, president and CEO of the Insurance Institute for Business & Home Safety in Tampa, Florida. “I would still argue that there’s probably more savings there but will accept 6-to-1.”
However, President Donald Trump signed an executive order in August revoking the establishment of a federal flood risk management standard that would have prompted federal agencies to consider current and future risk when taxpayer dollars were used to build or rebuild near floodplains.
“It’s kind of a shame for two reasons,” Ms. Rochman said. “Number one, elevating in flood-prone areas is always good. It’s not a political issue. It’s just common sense and engineering. Two, it was the federal government trying to lead by example.”
Even in the absence of a federal initiative, state and local governments can enhance their focus on disaster mitigation by implementing stronger building codes, experts say.
Building codes in Florida, for example, have reduced the risk of damage caused by hurricanes and tropical storms, experts say. IBHS conducted a study following Hurricane Charley in 2004 that showed a 40% reduction in the frequency and a 60% reduction in the severity of hurricane-related damage to homes built to stronger building code standards. More recently, Hurricane Irma tested the stronger statewide building code, with most of its damage affecting older infrastructure that had not been retrofitted, according to experts.
Florida was the second-highest scoring state in an IBHS study that rated the effectiveness of states in adopting and enforcing building codes, following only Virginia. In contrast, Texas received one of the lowest scores in the 2015 study because it does not require mandatory adoption and enforcement of its residential building code throughout the state, although homeowners must meet windstorm building code standards to obtain windstorm and hail insurance from state insurer Texas Windstorm Insurance Association.
“It’s those states that haven’t adopted the most modern building codes that will take longer to recover,” said Chris Hackett, senior director of policy at the Property Casualty Insurers Association of America in Chicago. “It’s going to take longer for businesses in those states to open their doors and for homeowners to get back to normal just because there’s going to be more property damage without those mitigation measures.”
FM Global estimated its policyholders that implemented physical risk improvements to protect facilities from flood reduced their overall loss exposure by $820 million during Hurricane Harvey, said Brion Callori, senior vice president and manager of engineering and research at the Johnston, Rhode Island-based insurer.
Insurers have a critical role to play in incentivizing mitigation, offering discounts for commercial property owners who take specific mitigation measures such as ensuring their properties are built to the most modern building code or using materials such as wind-resistant windows, Mr. Hackett said.
“Many companies will take that into account when developing a premium for a particular commercial risk,” he said.
“With disaster mitigation, I think insurers are taking a look at the risk and realizing they can afford to charge lower premiums,” said Peter Roldan, a San Francisco-based partner representing policyholders at law firm Emergent L.L.P.
Insurance companies are recommending the installation of floodgates in some flood-prone locations and are prepared to give premium credits that over five to 10 years can pay back the cost of that investment and prevent the recurrence of flood damage at the location, especially if these floodgates are built to their specifications, said Robert DeRosa, Houston-based senior managing director and head of Crystal & Company’s property practice.
“I really think that any activity from a mitigation perspective that’s explained directly to the carrier and explained the right way is going to be incentivized,” he said. “When you have locations where you know you’re going to get hit by a hurricane or flood — it’s not a matter of if, it’s a matter of when, and what are you doing to prevent that instead of just relying on your insurance company to provide coverage in the event of a loss?”
Advocates of disaster mitigation hope the lessons taught by the 2017 disasters are not lost, with the billions in damage caused by Hurricane Harvey showing what can happen if development is allowed in vulnerable areas with little to no thought about mitigating these risks.
“It’s important to not become complacent because we had a long stretch in Florida where we did not have significant hurricane activity. But then the 2017 season happened, and the risks and dangers associated with hurricanes became a reality again,” Mr. Hackett said.
“I think we’ve proven that once people have a loss, the message gets out, at least in the commercial arena,” Mr. Callori said. “The bigger question is how do you extrapolate that to convince people who haven’t had the loss yet but are exposed to take action?”
But as climate change instigates more frequent and intense storms, the answer in some areas will not be mitigation, but a prohibition on future development because of the difficulty in mitigating against an evolving danger, some experts say.
For example, a property could be built or retrofitted to be 3 to 5 feet above the current floodplain, but with rising sea levels, that level may not be sufficient in 15 to 20 years, said Craig Poulton, CEO of Salt Lake City-based Poulton Associates Inc., the underwriting manager and administrator of private flood insurer Natural Catastrophe Insurance Program.
“The best form of mitigation is don’t build there,” he said. “Building in exposed areas without taking extreme measures to raise the structure out of the floodplain is just foolish.”
As Puerto Rico continues to recover from Hurricane Maria, insurance experts are likely to turn their attention to the state of the U.S. territory’s building codes.