Rod Thaler examines how (re)insurance solutions can play a critical role in helping society become more resilient to the impacts of climate change
The Covid-19 pandemic has highlighted the need to better prepare for disasters, whether natural catastrophes or pandemics.
Yet many of our existing federal agencies have not developed the new skill sets necessary to accelerate implementation of broad resiliency measures.
For all the talk about filling the public-private sector risk gap, the silence has (generally speaking) been deafening even when there is low-hanging fruit staring us in the face.
Just before the start of the pandemic I met with Federal Emergency Management Agency (FEMA) mitigation leadership in Washington DC to outline how the (re)insurance industry can use its catastrophe risk management and distribution skills to systematically scale up residential catastrophe mitigation.
Ongoing research during the pandemic has reinforced my belief that applying (re)insurance core competencies can make a huge difference in better preparing the nation for the effects of climate change. The solutions do not involve “rocket science”.
Working with three successful state-based residential wind mitigation programmes – South Carolina, North Carolina and Alabama – for the past three years has revealed some incredibly positive opportunities for our industry.
I have outlined my findings and recommendations in a report to FEMA mitigation leadership in Washington DC, titled: “Creating Force Multipliers for Mitigation; Coming Together To Do More”.
Create a robust, state-based, distribution channel for fortifying homes, accelerating broader resiliency; tap the (re)insurance industry’s suite of analytics tools, portfolio management processes and innovative new risk transfer solutions to multiply the available resources for mitigation while simplifying the process, and speeding up the execution.
Elevate FEMA’s role on residential mitigation to be thought leader coordinating best practices among the states, creating a competition within the private sector globally to advance the best and most cost-effective residential mitigation measures for each of the peak natural catastrophe perils, and providing a clearinghouse of information available so that each state does not need to reinvent the wheel on mitigation. The science and technology exists to substantially reduce property damage from hurricanes and tornadoes, and much more is being developed to mitigate other perils as well.
Tapping the private sector
FEMA has existed since 1979 but its primary function has been disaster relief, and even with the Disaster Recovery Reform Act passed in 2018, the newly dedicated Building Resilient Infrastructure and Communities (BRIC) funding programme for pre-disaster mitigation (PDM) is largely focused on infrastructure and community projects, not homes.
Even if some BRIC PDM funds are made available to state mitigation programmes, the application process is unnecessarily burdensome – which can be a deterrent to more states creating or expanding residential mitigation programmes.
Unnecessary application process delays impact lives and cost billions in larger disaster payouts, but it does not have to be that way.
Applying a treaty reinsurance approach
When a state applicant is seeking FEMA PDM funds on behalf of a large portfolio of individual homeowners, with the specific homes not known in advance, it would be far more efficient to apply a treaty reinsurance portfolio management approach, wherein the categories of data required are agreed in advance, and the data can be provided within a certain period of time, otherwise the applicant is held accountable for any incomplete data.
Thus, FEMA would be treating state residential catastrophe mitigation programme applicants for PDM funding as if they were an insurance company seeking catastrophe reinsurance from a reinsurer.
The application process, like an underwriting submission, needs to clearly set forth the processes with built-in controls and with transparent data shared regarding the entire portfolio of homes at risk.
We have prepared a detailed side-by-side review of the FEMA PDM application questions, versus the information readily available from state residential catastrophe mitigation programmes.
Looking at the voluminous FEMA PDM application in the context of a reinsurance treaty, and being mindful of the level of data routinely captured by state mitigation programmes, it becomes very clear that it is possible to dramatically streamline the application process without diminishing the financial or legal integrity of the FEMA disbursement process.
The upside for the nation is that simplifying the way states apply for FEMA PDM funds materially enhances the states’ ability to engage private sector support, thereby multiplying the value of each FEMA PDM dollar, accelerating the onset of more resilient homes and communities.
FEMA, as part of the Department of Homeland Security, has budgetary constraints that preclude a hiring boost, especially focused on research and development. However, a proliferation of more state residential mitigation programmes could set in motion an explosion of innovation as each state seeks innovative ways to access private sector support.
Articulating the environmental and social benefits of fortifying homes now provides state residential mitigation programmes with a favourable wind; the continuing growth of ESG capital and the impact it can have on corporate behaviour.
Development of mitigation products
A key to engaging private sector support for state residential catastrophe mitigation will be the development of what I call “mitigation products”, in which state mitigation programmes provide a clearly defined service that helps businesses derive operational benefits by helping to fortify homes, whether for employees, customers, emergency first responders, healthcare workers or other designated groups.
Shifting the focus to providing operational value (workforce management, attracting and retaining workers or business continuity planning to minimise post-event production disruptions) rather than simply seeking a charitable donation, improves the opportunity to develop more meaningful, multi-year private sector support.
There is also the prospect of creating risk transfer solutions utilising ESG capital that may create more efficient catastrophe risk management options for insurance companies, especially as the proportion of fortified homes within the protected portfolio grows.
Using FEMA PDM grants as “seed money”, state mitigation programmes should be capable of securing proportionate, if not disproportionate, support from the private sector, with initial discounts to spur private support based on the amount and duration of private sector commitments to fortify more homes.
If each FEMA PDM dollar is matched by the state and also by the private sector, and each approved PDM dollar is estimated to reduce property damage by at least four times, the much more efficient leveraging of each FEMA PDM dollar is evident.
Leveraging technology and science
Just as insurers long ago began to leverage technology to streamline underwriting and processing of large volumes of small, homogeneous homeowners policies, so too FEMA needs to recognise the imperative to create an alternative distribution channel harnessing state residential catastrophe mitigation programmes.
A one-shoe-fits-all approach to large and small grant applicants is simply outdated.
Nuance is not dead; the benefits of resiliency need not be mutually exclusive.
Risk transfer is only one of the classic risk management tools.
The existence of more state residential catastrophe mitigation programmes – and for other peak natural catastrophe perils – when embraced by insurers in their cat risk management, marketing and underwriting, as well as ESG practices, presents a meaningful new way to address the increasing spectre of catastrophe frequency and severity arising out of climate change.
Systematic mitigation may help to reduce, if not offset, the volatility of risk transfer costs. When presented with this idea, one US senator quipped, “This is a no brainer.”
Rod Thaler is managing parter at RPT Mitigation Consultants LLC and formerly held leadership roles at Holborn, Aon Benfield, Willis Re and Guy Carpenter.