Building community financial resilience

Hurricane Ida left the US with extensive property damage from hurricane force winds, extreme rainfall and heavy flooding.

Industry estimates of the insured loss range from $17bn to $44bn with an economic impact reaching $95bn. This means an insurance protection gap of potentially greater than 60 percent, which is unfortunately consistent with world historical catastrophe events, and the gap is even wider in lesser developed countries.

Flooding outside of National Flood Insurance Program (NFIP) 1-in-100-year mapped flood zones is common and frequency is increasing as the climate and population distributions are changing. Hurricanes Ida, Irene and Floyd, each roughly 10 years apart, caused significant flash flooding beyond designated flood zones. These events resulted in billions of dollars of damage with only a small percentage covered by insurance, which amplified individual and community suffering. The NFIP take-up rate was less than 2.5 percent across many of the states within Hurricane Ida’s storm path, as shown in the chart below.

This past May, the Biden administration directed $1bn for communities through the Federal Emergency Management Agency’s Pre-Disaster Building Resilient Infrastructure and Communities program. The pre-disaster funds will be used for hazard mitigation projects and seek to shift the federal focus from reactive disaster spending to more proactive natural catastrophe risk management. Proactive management mitigates not only the loss of lives, but also the ultimate quantum of the economic cost. However, what is missing from the program is pre-disaster funding for insurance solutions that can help with post-disaster financial recovery.

Many households and small businesses either lack coverage or have insufficient coverage to fund repair and rebuilding after a disaster. This is especially true for those in low income and vulnerable communities where many families are realistically priced out of the market. Therefore, the additional cost to repair and rebuild falls on government and taxpayers in the form of post-disaster aid.

In the market, there are various approaches for managing post-disaster financing – from ex-post borrowing to catastrophe bonds to disaster fund schemes, as examples. A more local approach to addressing this challenge is the concept of community-based catastrophe insurance: a local government, a quasi-governmental body or a community group is empowered to build their own disaster insurance program. Here, post-disaster aid could be financed fully or partially through insurance and could complement existing financial protection in the event of a disaster. Furthermore, the solution can be structured with a parametric trigger that would provide community members with timely direct loss payments after an event, allowing them to put the dollars to their most immediate and beneficial use.

The disaster insurance program should function and run in parallel with a community’s risk awareness initiatives. For example, there is a widely held misconception that you are either in the flood zone or you are not and that if you are not in the flood zone, you do not need flood insurance. Flood insurance outside of designated flood zones is relatively affordable and will drop in price with more take-up. The value of insurance should be considered in pre-disaster mitigation planning and greater awareness made of the risks faced by individuals and the community, and the limits to public disaster relief. Increasing insurance take-up rates reduces the protection gap and builds more financial resilience for flood and other natural catastrophe events, such as wildfire and earthquake.

The wide scope and significance of this challenge presents a clear opportunity for the (re)insurance market to bring forth innovative solutions that address understanding, affordability and appeal. Marsh McLennan stands ready to partner with governments, local authorities and community groups in understanding the risk and exploring solutions of how it can best be managed.