Hello, Quartz members!
Phew. As Hurricane Milton blows through, the worst is over for Florida. But not everyone is done yet. Meteorologists have warned that tropical cyclones will become stronger and more frequent in the coming years as the oceans warm and sea levels rise thanks to climate change.
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Let’s talk about one reason why these storms continue to cause so much damage and how we can fix the problem.
moral hazard
A term that economists like to use is “moral hazard.” This refers to practices that create financial incentives that encourage risky behavior. This incentive for risky economic behavior was on full display last week when Hurricanes Helen and then Hurricane Milton hit the southern United States. Rushing tides and 190 mph winds blew off the roofs of homes and businesses (and even the Tampa Bay Rays’ baseball stadium), flooding everything within shoreline and causing damage estimated at well over $100 billion. brought.
This isn’t the first time severe storms hit the Florida coast, and meteorologists, climate scientists and insurance risk advisors say it’s certain to happen again, and with increasing frequency. states. So why are residents and businesses rebuilding again and again in the same places that were destroyed the last time?
insurance
The answer, according to those who have studied the issue, is insurance. Even as private insurance companies evacuate hurricane zones and raise premiums and lower coverage limits, the federal government, and to a lesser extent the state of Florida, remain the last insurers to protect homes. pays insurance benefits to people who were swept away and businesses affected. It overflowed. Programs such as the much-maligned Federal Emergency Management Agency, the National Flood Insurance Program administered by the Small Business Administration, and numerous other government programs are handing out cash. The federal Department of Transportation, Department of Housing and Urban Development, and Department of the Interior, as well as organizations such as the Army Corps of Engineers and the Federal Highway Trust Fund, are working with state and local governments to help rebuild dilapidated infrastructure.
“This is classic moral hazard,” says Simon Buechler, an assistant professor of finance at Miami University in Oxford, Ohio, and an expert on real estate, finance and catastrophes. That’s because homeowners and businesses in flood-prone areas pay below-market premiums because government insurance programs like NFIP underestimate risk.
“They’re basically giving relief to people who are uninsured or not fully covered,” Buechler said. “I don’t have to worry about it because I know that when disaster strikes, the federal and state governments will be there to help.”
Worse, Buechler said, guarantees of government relief actually encourage people to take risks they don’t have to pay for. “We know from research that this flooding triggers people to move into areas that are more prone to floods and hurricanes. That’s why we see more of these multi-billion dollar disasters. “That’s part of the reason,” he said.
Harbinger Hurricane
Helen and Milton are just the harbingers of what Everstream Analytics meteorologist John Davis calls a new era of environmental risk. Rising sea levels, rising ocean temperatures, and overall increases in temperature and humidity are putting all low-lying coastal areas like Florida at risk, and our region is not ready for it.
“The infrastructure that we have in place today is not prepared for what’s been happening recently and what’s going to happen in the future, 10 years from now,” Davis said.
Michael Hecht, CEO of Greater New Orleans, the city’s economic development corporation, said making communities more resilient to storms is the key to keeping people living and working in flood-prone areas. He said it was the key. He helped rebuild New York after the Sept. 11, 2001, terrorist attacks and helped New Orleans recover from Hurricane Katrina.
“Most disasters are the result of human policy decisions that lead to bad outcomes,” he said, citing engineering, design and planning errors that led to Katrina. Instead of putting money into rebuilding properties that will only be damaged by the next storm, “what we need to do is invest that money in resiliency, better construction methods, and protecting our communities. That way we can live near water and do it in a way that reduces exposure.”
And for those still affected by the disaster, Hecht says they should pay to move to higher ground.
follow the money
To build new developments or rebuild areas destroyed by hurricanes, developers need money from banks and investment funds, said Scott Popilek, an insurance consultant and Atlantic region leader at Risk Strategies. He said he needed to borrow money and needed insurance to protect those funds. and intermediary. “Florida has seen developments in recent years where developers are pulling out and insurance cannot be found for certain developments,” Popilek said. “When (storms) of this frequency and intensity start occurring consistently, banks are going to start worrying about their money.”
Either way, the increasing frequency and intensity of extreme weather events threatens Florida’s economy.
Jay Guinn, chief research officer for catastrophe solutions at insurance industry Verisk, said: “Will low premiums cause a crisis, repeated damage from climate change will cause a crisis, or rising sea levels will cause a crisis? “Something will happen in the next few decades.” Risk consultant.
The crisis has already arrived at the retail level. As The Wall Street Journal reported last week, the Great Florida Migration is unwinding, with a surplus of homes as buyers lose interest in moving south. And now, extreme weather conditions are making the situation even worse, with more people deciding to leave and more homes being put on the market as buyer interest wanes and sales slow.
Possible solutions
Some insurance experts and climate watchers believe there is a way to solve this problem. It would create a federally supported national fund to insure against all types of climate disasters and carefully manage the risks it undertakes.
It’s not that the market has failed and forced government intervention, it’s that private insurance companies are doing what they’re supposed to do. If they can’t sell insurance at the price needed to cover the risk, they exit the market.
Cliff Rossi, former head of global consumer risk management at Citi, is a federally chartered national climate risk insurer, much like the mortgage insurance companies Fannie Mae and Freddie Mac, also known as governments. He is a strong advocate. Sponsored Entity, or GSE.
Mr. Rossi, currently director of the Smith Enterprise Risk Consortium at the University of Maryland Business School, said that people whose mortgages are insured through Freddie or Fannie already have He said it is mandatory to have flood insurance.
Rossi said the current system is flawed. “This provides an incentive for people to continue living in very important areas that are increasingly exposed to (severe) storms,” he said. “We need to rethink our approach to who is allowed to buy insurance.”
Denying government-backed insurance for second homes, requiring compliance with strict building codes, and limiting the amount paid per claim would limit both damage and the cost of cleanup and rebuilding. It will be.
Rossi noted that state-funded insurance programs aimed at disaster recovery, such as Florida Citizens Insurance, a nonprofit insurer of last resort with 1.26 million policies, are underfunded. . “If we were to focus solely on Florida homeowners, we would be concentrating the risk at a very high level, which would result in very high costs,” he said.
Are you a national natural disaster insurance company?
That’s where Mr. Rossi’s Federal Natural Catastrophe Insurance Corporation comes into play. As a GSE, the insurance company will package credit risk in the same way that Fannie and Freddie package mortgage risk and resell it to the private market. His plan would also absorb FEMA’s National Flood Insurance Program.
“Part of this new federal structure will include actuaries and scientists who can more accurately identify and price risks associated with all types of climate risks, including droughts, wildfires, earthquakes, storms, and floods. ” Rossi said. The company would then repackage and sell the risks.
This would solve the problem of private insurers withdrawing from climate-related risks due to the uncertainty associated with estimating climate-related risks. However, by having an organization that specializes in pricing and insuring climate risks, and having the federal government as the ultimate guarantor with support from the U.S. Treasury Department, companies can take risks to the extent that they can rely on insurance. will be reduced. Be affordable and inclusive. And stricter insurance eligibility requirements would reduce the incentive to locate or rebuild in the wrong location.
Mr. Rossi spent time working with major insurance companies, state and federal authorities to develop a plan. He said the players all seem enthusiastic, but there’s only one problem: Congress. The new GSEs would require parliamentary charter approval, which is unlikely in a divided government.
“It’s going to take longer for us to get through consecutive Category 4 or 5 storms,” Rossi said. “And at some point, that’s going to be the catalyst for some kind of large-scale intervention.”
Thank you for reading. Always be prepared to evacuate.
— Peter S. Green, Contributing Editor
