Re-insurers as Catalysts
Mitigating the Impact of Climate Change Now
As many different industries, including re-insurers are addressing the causes of climate change, re-insurers can provide more tangible leadership applying indigenous catastrophe risk expertise to help people mitigate the effects of climate change. The time to act is now, not next year, using our core competencies in managing catastrophe risk, to spur others to become actively engaged in supporting residential catastrophe mitigation nationwide.
The ideas expressed herein have not been developed in a vacuum by a Washington think tank. Rather, these are the ideas of a catastrophe risk practitioner for over four decades having been immersed in a dedicated project for more than three years to expand funding sources for residential catastrophe mitigation, which of necessity has included a deep dive into one state’s interaction with FEMA, so as to create an informed basis for recommending positive changes.
Incremental Improvement in Natural Catastrophe Mitigation Efforts Will Not Move the Dial
The economic consequences of not taking more significant steps now to mitigate potential catastrophic events can be devastating. There are many lessons learned from the pandemic, beyond the personal tragedies. We are living with the economic consequences; a weakened economy that is ill prepared to shoulder large natural catastrophes body blows.
FEMA alone is not the solution
While FEMA’s main focus for dispersing BRIC funding, understandably is on infrastructure, and multijurisdictional or community projects, it could be a pyrrhic victory for those communities or counties post event if the accumulation of debris removal expense due to the sheer number of homes losing their roofs, collectively causes local budget havoc, severely impacting local funding available for essential services such as school, police, health services. With the prospect of an increase in the frequency of severe natural catastrophes due to climate change, business as usual will not carry the day. FEMA is stretched on Covid-19, disaster recovery, and larger infrastructure mitigation. So, with limited pre-disaster mitigation (PDM) funding for homes, this simply magnifies the need to be more efficient, and to create force multipliers.
RECOMMENDATION: FEMA Should Incentivize States to Create Residential Catastrophe Mitigation
Necessity has been the mother of invention in previous times of national challenge, spurring greater private sector initiatives to make government more efficient. A report titled, “Force Multipliers for Mitigation; Coming Together to Do More”, was recently submitted to FEMA Mitigation leadership in Washington, DC. This report provides a detailed outline of the many force multipliers to exponentially broaden the reach of home mitigation for hurricane and tornado, and aspirationally, to apply a similar process to address other peak catastrophe perils over time. The ability to elevate the discussion of natural catastrophe preparedness, can create closer coordination of best mitigation practices between states, helping to take tangible steps to address climate change.
Why State Residential Catastrophe Mitigation Programs?
FEMA spurring the creation or expansion of state home mitigation programs would create an additional distribution system to efficiently spread mitigation, not unlike insurers creating more efficient distribution channels for simpler personal lines insurance product. Also, this approach would enable FEMA to concentrate on larger infrastructure and community mitigation projects which indisputably require more of FEMA’s time and expertise. Facing budgetary pressure, FEMA will be focusing on many pressing issues so that resources remaining for residential mitigation will likely be relatively small, certainly not the needed quantum leap in resources and efficiencies
FEMA Incentivizing States to Build Residential Mitigation Serves a Larger Agenda
Introducing private sector efficiencies in managing the application process for mitigation funding and data reporting can be achieved by incorporating portfolio management processes as used in treaty reinsurance. Making the process easier for homeowners (and for states) is critical to accelerating home resiliency nationwide.
Spurring states’ outreach to private sector partners on far less complicated projects, with multiple states as “innovation labs for mitigation” would likely foster greater awareness of more creative ways to engage the private sector, potentially multiplying the value of each FEMA Pre Disaster Mitigation dollar, which is a high FEMA priority.
Sharing lessons learned by the existing state mitigation programs will provide valuable insights from AL, SC, and NC. (See video on fortified homes in recent Hurricane Sally). Focused sharing of best practices can be accelerated through dedicated virtual conferences, but in the meantime simply sharing some links provides a snapshot of the value of fortifying homes, and a proof statement that state wind mitigation programs are effective.
Institute for Business and Home Safety: Science with Proof Statements
The science and technology behind the FORTIFIED HomeTM standard
Enhancements leading to FORTIFIED HomeTM based on empirical evidence
National recognition for Strengthen Alabama Homes Build Strong DC Forum 2019
Note: The author remains independent of IBHS though he does applaud the quality of IBHS’ work. However, if other organizations develop more suitable standards for mitigating residential catastrophe risk, states and their citizens should be able to avail themselves of the optimal risk management solution, regardless of what organization develops such new solutions.
Technology Exists to Materially Reduce the Catastrophe Risk Effects of Climate Change
The insurance industry is uniquely well-positioned to apply its core strength in catastrophe risk management that can help spur other industries and multiple layers of government, to make it a priority to accelerate the process of hardening homes to natural catastrophe damage. As diverse industries become engaged in supporting residential catastrophe mitigation, whether for their employees, to support their communities or in support of their larger corporate ESG mission, re-insurers will benefit from the resulting increase in resilient homes, which might be described as a “de facto quota share” benefitting re-insurers. There is more discussion of customizing various mitigation products to appeal more specifically to a business’ operating, branding, marketing or ESG priorities, in the report to FEMA referenced above.
Narrowing the Damage Path of Tornadoes and Hurricanes
A high percentage of wind damage occurs at wind speeds < 115mph which can be protected, covering a high percentage of the wind field, lessening the impact of post event demand surge. Think of a 200-mile-wide hurricane wind field and ask yourself why should we continue to allow damage to occur in ¾ (or more) of the wind field, at wind speeds less than 115 mph, that could be prevented.
Safer Cars, Safer Homes... It Is Not a Coincidence
There are good examples of how Residential Mitigation programs in a few states already make it easier for homeowners to fortify their homes against hurricanes and tornadoes (Alabama, South Carolina and North Carolina). Not unlike the rapid advances in auto safety led largely by the Institute for Highway Safety, The Institute for Business and Home Safety is rapidly making strides in eliminating hurricane wind damage in all but the most severe events. The common denominator is that these organizations have been backed by insurers and reinsurers, actively focused on reducing risk.
Environmental, Social and Governance (ESG) Imperatives Can Help Spur Residential Catastrophe Mitigation by Employers and Others
It is possible to build resiliency even with stressed state budgets, and a big new factor is that fortifying homes helps businesses address corporate ESG priorities while achieving meaningful operational as well as branding benefits. Keeping roofs on homes avoids more household toxic waste going into landfills post event, while providing personal protection, as well as shielding local budgets for social services, police, health care from drastic cuts if towns are faced with staggering debris removal costs due to more homes being destroyed.
There Are Many Benefits to Systematically Spread Fortified Homes Nationwide
Compelling economics for homeowners / helping the economy while protecting people.
Social and environmental / fortifying homes in impoverished areas, avoiding more toxic waste.
Uniting diverse segments of society / reinforcing trust that government can be efficient.
Economic Benefits of Expanding State Mitigation
State Economic Benefits
The University of Alabama Center for Business and Economic Research has studied the economic impacts of the Strengthen Alabama Homes (SAH) state wind mitigation program, in Baldwin and Mobile counties, focused on output, value-added, earnings and employment. Output refers to total or gross business sales and contains value added, which is contribution to gross domestic product (GDP) or the value of goods and services produced on a value-added basis. Earnings impacts are part of the value-added and are the wages and salaries of the workers recognized by the employment impact.
Source: “Economic and Fiscal Impacts of an Increase in Consumer Spending on Baldwin and Mobile Counties and the State of Alabama.” University of Alabama Center for Business and Economic Research. A copy of the complete study is available here.
Notes: The economic impacts focus on output, value-added, earnings and employment. Output refers to total or gross business sales and contains value-added, which is contribution to gross domestic product (GDP) or the value of goods and services produced on a value-added basis. Earnings impacts are part of the value-added and are the wages and salaries of the workers recognized by the employment impact.
Reducing Disaster Payouts, Protecting the National Debt
Catalyst Value to the Nation
In view of the pandemic, with the national debt exacerbated and with the looming need for large infrastructure funding, it has never been more important to find fiscally prudent risk management solutions. Doing nothing to accelerate making more homes resilient will cost far more. The exhibit below simply puts a marker in the ground to give some sense of how more residential state mitigation programs could materially reduce damage based on a few different scenarios. Two key factors are simplifying the process for states to interact with FEMA, and sharing the lessons learned by the initial state programs in accessing private sector support.
The multiplier value increases most steeply when more of the key cat prone states engage, the size of the BRIC PDM fund grows, and states are able to secure disproportionate support for each PDM dollar used by states to prime the pump with larger employers in their state. Having established a growing number of such state residential mitigation programs creates a built-in distribution system to more efficiently push out much larger PDM funding in the future, and to be able to do so much more quickly.
National Economic Benefits
* Above assumes that each state commits $10 million, but in reality, some will commit more or less.
** If DRRA was enacted one year earlier, based upon the larger cat losses, the PDM Funds would be closer to $3B this past year, so if the amount increased by 6-fold but the amount allocated for state mitigation was only doubled, it would still provide a large reduction in damage.
Widely accepted savings ratio of $1 mitigated = $4 less damage (National Institute of Sciences).
Idea is to turn each FEMA mitigation dollar into $2 to $3, and increasing the mitigation value from $4 to$12
If states are successful in using discounts to secure employers’ commitment to fortify a minimum number of employee or others homes each year, the multiplier value of each PDM dollar could jump much higher, making the above figures very conservative.
Environmental Benefits of Expanding State Residential Mitigation
Collaborating with various professional and academic institutions can help create more empirical evidence to help quantify the value of fortifying homes. Expanding the breadth of analysis to quantify diverse benefits of fortifying residential homes can be spurred by state mitigation programs forging close relationships with leading universities in their state.
Some initial areas of university research may include the following:
Environmental impact, and cost savings by reducing debris removal post event as more roofs staying on homes reduces the amount of toxic household waste going into landfills, streams.
Quantifying the financial dislocation to towns, municipalities due to the adverse budget impact of unexpected large debris removal costs.
Quantifying the significant reduction in demand surge construction costs post event by sharply reducing the damage path of the event.
Where do they put all that toxic hurricane debris?
Wood, plaster, drywall, metal, oil, electronics — all waterlogged. It is put into unlined landfills which can contaminate groundwater. The gypsum in drywall decomposes into hydrogen sulfide gas often gets dumped all together.
Keeping Roofs on Homes Can Reduce Damage by Significantly More Than 50%
Creating jobs and making small business owners’ homes resilient against hurricanes and tornadoes helps to fortify lives and businesses.
Social Benefits of Expanding State Residential Mitigation
Supporting impoverished communities is a huge priority for FEMA. State mitigation programs are better positioned to partner with local community foundations enhancing the quality of housing provided to impoverished communities. The systematic statewide approach, building upon local community foundations’ existing ties to impoverished communities and local business leaders, can be solidified with a diverse array of “mitigation products,” that help customize private sector support.
Strengthen Alabama Homes has already begun to fortify homes in Africatown, working closely with the mayor of Mobile’s Community Development leadership. But there are many more homes yet to fortify in Africatown and in other impoverished communities such as Woodlawn in Birmingham, AL.
Prioritizing grant awards to impoverished communities is also enhanced by state mitigation programs since the neediest communities often exist within larger counties, that can mask the true need when the county average income level is considered in the current FEMA application process. Instead, the state mitigation program, with local knowledge, can more easily prioritize local business support for impoverished communities (such as Africatown in Mobile, and the Woodlawn community in Birmingham), focusing on the much lower income levels within each of these smaller geographic areas.
Final Thoughts
Redefining our relevance by applying core competencies to address larger societal needs.
Re-insurance as an industry has been accused of collectively having low self-esteem when it comes to the value that we create for society. By simply applying a number of our core competencies it has been possible to identify some pretty logical recommendations that would broaden and accelerate resiliency throughout the nation
Articulating value. Having conducted over 80 meetings in Alabama, communicating how diverse businesses and government leaders benefit from the greater resiliency that is derived from fortifying homes, is simply articulating value. Similar to convincing different underwriters why a ceding company’s program structure and pricing makes sense in the context of the underlying exposures. This is a journey not a sprint, and will no doubt be aided by ESG considerations as a favoring wind that did not exist heretofore.
Adapting best practices. Let nothing evade your eyes, plagiarize! Applying more efficient practices from treaty reinsurance to ramp up capacity to mitigate more homes while controlling the cost, reducing the processing time, and maintaining transparent controls. Sitting with Brian Hastings, the Director of the Alabama Emergency Management Agency as he and his executive leadership team explained the labor-intensive, “facultative” approach to applying for FEMA Pre-Disaster Mitigation funds, hit a sensitive chord… we can definitely assist FEMA and states to adopt private sector efficiencies that have been proven to work. Making it easier for states to access FEMA Pre Disaster Mitigation funds does not mean less financial control as we demonstrate in a proposed project, explained in “Creating Force Multipliers for Mitigation”, Section 4, Creating a Test Case for FEMA.
Innovating new distribution ideas. With a plethora of new products and distribution ideas reshaping the re-insurance industry, it is natural to think about unleashing the power of a new distribution system for FEMA, though that is not something that would naturally be raised internally by FEMA leadership. Having come through the Pandemic, witnessing the ubiquitous role of FEMA as the national backstop for all manner of emergencies, it is high time that FEMA’s capabilities be reinforced with state-based residential catastrophe mitigation programs, creating a quantum leap in the broad reach of mitigation while simultaneously accelerating its implementation. All the while, FEMA’s role as thought leader on Mitigation is enhanced, as it will increasingly be at the nexus of identifying and sharing best mitigation practices among all states.
The ideas expressed herein only scratch the surface, much like an iceberg where only a relatively small portion is visible at the surface. More will be revealed in the coming months as we need to accelerate the pace of innovation. And yes, the re-insurance industry can lead by example!