But the debate about federal relief misses an important fact. While it has been hard, practically, to restrict construction in hazard-prone areas along the coast, flood risk can be insured. Typical homeowners’ insurance covers wind damage, but it excludes flood losses. Still, homeowners can obtain flood coverage from the federally run National Flood Insurance Program (NFIP), up to $350,000 (building and contents) and with a deductible as low as $500. Many large insurers (yours too, most likely) sell NFIP policies on behalf of the federal government and assess flood claims in exchange for government fees.
This program has grown significantly in recent years and provides insurance to 5.3 million policyholders, rich and poor, across the country today. The program now covers more than $1.2 trillion in assets (a 250% increase since 1990, when corrected for inflation). This is not a small program. Because public insurance is offered by the Federal government, which does not face additional expenses (cost of capital, return to shareholders, taxes) that private insurance companies would, its cost is relatively low — on average $50 per month.
Still, many people don’t buy flood insurance, and many of those who purchase it don’t keep it for long. In the Louisiana parishes affected by Hurricane Katrina in 2005, the percentage of homeowners with flood insurance ranged from 57.7 percent in St. Bernard Parish to 7.3 percent in Tangipahoa when the hurricane hit. Only 40 percent of the residents in Orleans Parish had flood insurance.
I hope Irene will show a different picture, but I would not bet on it. We also recently did the first ever study of flood insurance tenure — the number of years that people keep their flood insurance policy before letting it lapse. Our analysis of the entire NFIP portfolio over the period 2001-2009 reveals that, on average, this tenure is only three years. Many people buy flood insurance when they buy a new house because the bank requires flood insurance proof to authorize a federally backed mortgage if the residence is in a flood plain. But they cancel it fairly soon after. Then, they suffer a flood and regret not having kept that coverage longer. And don’t think this behavior is specific to flood. Ninety-one percent of Californians do not have earthquake insurance today. The state is virtually bankrupted, so I forecast that all of us as taxpayers will pay when the Big One hits California. Consider yourself warned.
What is the solution? Several prime ministers, presidents and rulers around the world have now put this question of management and financing extreme events on their agenda. Many more executive boards are doing it too, trying to figure out how best to act strategically, protect their firms’ assets and create new products to hedge catastrophe risk. It’s almost impossible to argue against this being a matter of national interest — to say nothing of good governance and competitiveness.
We must limit the amount of new construction in high-risk areas and make sure people and firms already in those areas have proper financial coverage to assure they can get back on their feet quickly after the next catastrophe. This will cut down on taxpayer expense. Unless we start to get serious about making the country more resilient to natural disasters, we won’t be prepared for what the 21st century has in store for us.
Without quite realizing it yet, America is at war against the weather. Irene and the wildfires in Texas are just the latest battles. More is soon and sure to follow.
Erwann Michel-Kerjan is an authority on managing and financing extreme events. He teaches Value Creation in the Wharton School MBA program and is the Managing Director of the Wharton Risk Management Center. He is the author of several acclaimed books, including At War with the Weather (with Howard C. Kunreuther).
Read more news and ideas on Innovations
. Follow us on
, and become a fan on