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14 Jan 16 16:44

While attending the 96th Annual Meeting of the American Meteorological Society in New Orleans, I had the pleasure of listening to Craig Fugate, the current administrator of FEMA, give a keynote speech during a symposium discussing Hurricane Katrina at 10 years. 

Administrator Fugate is a hugely engaging speaker with a no-holds-barred, no nonsense manner of message delivery. It was very refreshing to hear Director Fugate talk openly and candidly about the importance of insurance, particularly reinsurance, in helping communities plan for and recover from disasters.  Insurance, he said, is key in signaling how and where we should build.

We've fallen into a culture where we frequently build in high hazard areas with limited consideration of the potential consequences.  We then expect to be able to insure our assets at rates that are often below actuarial rates. This current paradigm of build first, worry about insuring later, has led to financially unsustainable programs like the NFIP being developed, and individuals being underinsured or uninsured. 

Consequently, we see an increasing gap between the insured and total economic loss, the protection gap, and this gap then leads to knee-jerk decisions being made on recovery funding in the wake of an event. 

If we build initially with the principles of insurability in mind, namely that the premium rate should be guided by the level of risk, communal resilience will increase, while the protection gap will decrease. Homes and commercial structures built to high quality standards that can withstand high wind speeds, fast moving storm surge and intense ground shaking will be less vulnerable to extreme events, allowing those that reside and conduct business there to do so with less interruption post-event.  

Additionally, the technology and tools of the re/insurance industry, catastrophe models, can consider enhanced building quality when calculating the loss potential to a structure.  All other things being equal, the cost of insurance will decrease as the quality of the asset increases. 

Constructing homes and businesses to ensure insurability up front is a more productive investment of financial resources than trying to free up resources in the wake of an event to fund recovery. While the investment up front is marginally more costly, the rate of return on investment in the wake of an event is almost immeasurable. If governments want to provide subsidies, the subsidies should not be in the form of premium subsidies, but rather as building subsidies to improve the quality of construction or reconstruction. 

I applaud Administrator Fugate for his insight and candor, and for the important message he's trying to communicate.

Category: Climate/natural disasters: Climate change, Disaster risk, Earthquakes, Floods/storms, Resilience

Location: New Orleans, LA, United States

1 Comment

David Sinai - 17 Feb 2016, 2:26 a.m.

Hi Megan. Great blog - very well put. The message is so simple that it seems hard to understand why it is so often (seemingly) misunderstood....?

Here in Australia, we are awaiting the findings of the Northern Australia Insurance Affordability Taskforce. Whilst the insurance industry position (and submission to the taskforce) is to advocate for resilience measures to reduce risk, I remain fearful that the 'solution' to the problem will involve some form of structure (ie. govt sponsored pool) that will rely on premium subsidies to make premiums more affordable. Let's see what transpires. I'm hopeful (but not convinced) that common sense will prevail....


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