Managing losses caused by natural disasters caused by climate change

Damage, destruction and loss of life from natural disasters has exploded over the past two decades due to climate change, with 2021 shaping up to be one of the worst, if not the worst, years ever. From devastating wildfires in the western states to fierce hurricanes and flooding in the Gulf and East Coast states, losses from extreme weather events will only worsen in the years and decades to come. to come.

Climate change is causing death and destruction in areas previously believed to be at relatively low risk of catastrophic natural disasters, so this is not a situation where only those affected have assumed the risk of destruction by choosing to build in areas known to be at high risk. . Indeed, experts estimate that more than 40 million homes worth $ 187 billion are currently at high risk of destruction due to forest fires.

Floods account for 90% of all losses from natural disasters and four hurricanes since 2005Katrina, Maria, Sandy and Harvey collectively caused more than $ 900 billion in damage. Hurricane Ida damage could exceed $ 95 billion, according to an AccuWeather estimate.

As America drowns and burns simultaneously, private insurers that sell home and commercial property insurance typically exclude coverage for flood damage, and they typically do not insure properties located in areas with high levels of damage. high risk of forest fires unless required to do so by law.

Why insurers do not cover floods

This coverage gap has occurred because natural disasters are considered to be correlated risks, that is to say they impact many goods in the same geographical area at about the same time. Insurers say correlated risks cannot be insured profitably because insurers are unable to collect enough premiums from a sufficiently diverse group of policyholders to assess risk comprehensively and accurately.

Therefore, under the current private insurance scheme, much of the damage that is and will be caused by natural disasters caused by climate change is uninsured. Even after there is a global will to tackle climate change – a problem of global collective action – it will take decades to reverse the effects of climate change, unless there are technological breakthroughs.

So what can be done to deal with the devastating destruction that climate change disasters will bring? given that the effects of climate change will be with us for the foreseeable future?

Use zoning laws and building codes to limit losses

Part of the answer is to use national and local zoning laws to prevent future development in high risk areas. Another part of the answer is to demand that repairs to existing properties be carried out to standards that will withstand future natural disasters.

The Florida Hurricane Building Codes that were created after Hurricane Andrew in 1992 are one example, as are the reconstruction requirements for flooded properties under the National Flood Insurance Program (NFIP).

But these measures will do nothing to help the millions of existing homeowners whose properties will be destroyed by natural disasters in the years to come. So figuring out how to insure catastrophic losses is a necessary part of the answer.

Government will need to be part of the response, and there are many approaches that can be taken.

A need for federal participation

One approach would be for Congress to require home and commercial property insurance to cover losses from natural disasters. However, to avoid a massive exodus of private insurers from the insurance market with such a mandate, the federal government would likely have to act as a reinsurer for private insurers. losses above a certain stop-loss point.

It is now doing this for losses due to terrorism under the Terrorism Risk Insurance Act of 2002. One of the advantages of this approach is that it would preserve a competitive private insurance market.

Another approach would be for the federal government sell group insurance against natural disasters. Under this approach, policies would cover losses due to floods, forest fires, hurricanes, landslides, tornadoes, etc., in one policy.

Combining coverage for several types of natural disasters under one policy would solve major problems that exist with single-risk insurance, such as the National Flood Insurance Program. Very few people buy stand-alone flood insurance under the NFIP, due to the lack of awareness of their flood risk and the high cost of insurance.

Flood insurance is expensive because only those most at risk of flooding buy it, so the pool of policyholders funding the program does not include many low-risk properties. By consolidating coverages for various natural disaster risks into a single policy, the insurance program would have a pool of policyholders with varying risk profiles.

Additionally, as is currently the case with home insurance, banks would likely require properties with mortgages to have a natural disaster insurance policy to ensure that the mortgage amount is protected. As a result, millions more properties would be insured for natural disaster losses than they currently are.

The best approach is debatable. One thing, however, is not. Natural disasters caused by climate change have arrived and will only get worse. Instead of the current approach, which uses ad hoc taxpayer-funded post-loss government bailouts to provide assistance to affected landowners, America should consider a new approach.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

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Author Info

Christophe C. French is a law professor at Penn State Law. He is the author of a collection of jurisprudence, “Insurance Law and Practice: Cases, Materials, and Exercises” and co-author of a reference book on insurance law, “Insurance Law in a Nutshell”. He was previously a litigation partner at K&L Gates LLP.

About Teresa G. Wilson

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