Senate Banking, Housing & Urban Affairs Committee Issues Testimony From Marsh McLennan Managing Director Kaniewski
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We have a deep understanding of flood-related risk and insurance issues, having been engaged with property insurance challenges since our beginning more than 150 years ago. We work with clients -- including individuals, businesses, organizations, governments, and communities -- to analyze their flood risk exposures; help them implement solutions before, during and after an event; and to address and mitigate the financial impact of natural disasters, including flooding, through insurance and other risk transfer tools.
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Executive Summary
Flood risk in the US is systematically underestimated, contributing to gaps in the insurance coverage and the resilience measures that can help communities minimize and recover from losses. Federal policies and programs, including the National Flood Insurance Program (NFIP), are essential, but state and local officials and homeowners play essential roles in flood resilience.
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Closing the flood resilience gap
There are several ways to improve risk readiness and mitigate the impact of floods. These include NFIP reforms and complementary solutions:
* Strengthen the NFIP with a long-term reauthorization and reforms, and protect it with reinsurance.
* Grow the private flood market and promote additional coverage to complement the NFIP.
* Address gaps in NFIP coverage.
* Embrace parametric insurance.
* Leverage existing NFIP incentive programs such as the Community Rating System (CRS).
Actions at the state and local levels are also necessary.
State resilience programs such as
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Community-based catastrophe insurance
Community-based catastrophe insurance (CBCI) is an innovative approach to boosting insurance purchasing, providing property coverage arranged by a local government, quasi-governmental body, or community group. The benefits of CBCI include enhancing financial resilience, providing affordable coverage, and creating incentives for risk reduction at the community and individual levels. A CBCI pilot program is boosting financial resilience of a community in
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A comprehensive flood resilience strategy
Federal, state, and local officials need a clear vision that strikes a balance between addressing crises and fostering resilience. Insurance and risk transfer have an important role to play, but must be combined with a broader, coordinated resilience strategy that includes risk reduction measures. Incentives for such measures exist now in the form of federal grant programs. To fully close the flood resilience gap, innovations beyond these programs and a broader range of stakeholder engagement will be necessary, including:
* Building code adoption, enforcement and retrofits, as well as zoning laws.
* Stafford Act incentives.
* Community Disaster Resilience Zones
* Engaging cross-industry stakeholders as co-beneficiaries of resilience investments
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The flood resilience gap
Despite being one of the most common and destructive natural hazards, flood risk is systematically underestimated, which contributes to inadequate insurance, underinvestment in flood resilience, and policy decisions that, in many cases, may not be helping. And the gap between economic and insured losses from flood has only been widening. Between 2007 and 2021, only 17% of global flood losses were insured, according to a
With the increasing frequency and severity of flood events, together with population growth, economic development, and urbanization, the nation's people and infrastructure are at greater risk. Significant flooding events in the US in 2023 included:
* Tropical Storm Hilary was the first such storm to hit southern
* Record rains caused catastrophic flooding in four counties in western
* More than 25 inches of rain fell in
* Historic rainfall in
Gaps in flood risk protection exist not only in insurance coverage, but in resilience measures that can help communities minimize and recover from losses.
In inflation-adjusted 2021 dollars, global economic losses from floods increased from
We believe that risk reduction and risk transfer are key to increasing the resilience of communities to the pervasive risk of flooding. Federal policies and programs, including the National Flood Insurance Program (NFIP), are essential, but communities and individuals are ultimately responsible for managing and mitigating flood losses. Whether investing in flood mitigation measures, including public infrastructure upgrades and retrofitting homes and buildings, or purchasing flood insurance, local officials and homeowners play essential roles in flood resilience.
As highlighted in our recent report-- Staying above water: A systemic response to rising flood risk -- we believe that local officials must consider how to manage flood risk and build resilience, in addition to flood insurance. This entails:
1. Learning to live with floods through a cross-societal push for resilience, with communities, businesses, and governments implementing small-scale measures to mitigate risks and minimize damage.
2. Building strategic protection by deploying large-scale systemic interventions to protect critical assets and ensure financial resilience.
3. Preparing for relocation by facilitating resettlements of people and assets from high-risk areas in a timely, equitable, and financially viable way.
Funding and implementing these strategies will require decisive action, effective leadership, and innovations such as those being tested now in
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Closing the flood resilience gap
Flooding disproportionately affects lower-income communities, which are more vulnerable and more exposed to flooding. One way to help bridge the divide is by increasing participation in flood insurance. Studies have shown that individuals and communities with flood insurance recover better and faster than those without.
It's important to keep in mind that insurance is but one piece of a flood resilience strategy, along with investment in risk reduction measures, enhanced access to flood risk data, and smarter land use planning. But, while insurance is a critical part of recovery from natural disasters, many households and businesses simply do not have adequate coverage for repairs and rebuilding.
The reasons for low coverage rates vary and include affordability constraints, limited risk awareness, poor understanding of insurance, and behavioral biases in decision-making. The continuing flood resilience gap in
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We believe there are several ways to improve risk readiness and mitigate the impact of floods. These include:
Strengthen the NFIP. With current debt of more than
A key part of
Protect the NFIP with reinsurance solutions.
Grow the private flood market. The Biden administration has proposed a package of NFIP reforms in which it recognizes the role of a private flood insurance market in supplementing and supporting the government-backed program. Private flood insurance can offer options that make purchasing flood coverage easier and more attractive. Each property that obtains flood coverage in the private market is a risk the NFIP and US taxpayers do not have to bear. The private market offers the possibility for innovation and products to further close the flood insurance gap.
Address gaps in NFIP coverage. The NFIP has gaps in coverage for residential and commercial properties. For residential properties, additional living expenses (funds to pay living expenses while the flooded property is repaired) are not included in NFIP policies. For commercial properties, business interruption is not covered by NFIP. As we have seen in previous flood events, those homeowners and businesses without these types of coverage struggled to recover. Of note, private flood policies often do cover these expenses for homeowners and businesses, respectively.
Embrace parametric insurance. A form of alternative risk transfer that is growing in demand as a tool to improve disaster resilience, parametric insurance solutions deploy a measurable index with predefined triggers. Unlike most forms of traditional property insurance, pricing is based primarily on the probability of the loss indexed being triggered rather than the specific risk of damage suffered by the benefit's recipients. This is particularly effective where it is either not possible, feasible, or desirable to assess the underlying exposed interests. Parametric solutions offer a more expedited contract payout, typically getting funds into the hands of those who have suffered loss in a matter of days, which can accelerate recovery. This is particularly important when it comes to flood as a delay in restoration can result in proliferation of mold, which over time contributes to health problems.
Promote excess flood coverage to complement the NFIP. While the NFIP remains a valuable source of flood insurance, its coverage limits are insufficient for many higher-value properties with flood exposure. Such properties need excess coverage to supplement NFIP protection. For example, in the third quarter of 2023, the median price of homes sold in the US was
Leverage existing NFIP incentive programs such as the Community Rating System (CRS). CRS is a voluntary incentive program that recognizes and encourages community floodplain management practices that exceed the NFIP's minimum requirements. Over 1,500 communities participate nationwide.
In CRS communities, flood insurance premium rates are discounted to reflect the reduced flood risk that results from community efforts to address the program's three goals:
1. Reduce and avoid flood damage to insurable property
2. Strengthen and support the insurance aspects of the NFIP
3. Foster comprehensive floodplain management
"This is a huge step forward in resilience for our county,"
To encourage further participation in the CRS program,
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Innovative state and local resilience programs
While federal resilience grants often receive the most attention, several states are allocating state budgets and leveraging other funding sources to build resilience programs. Some are primarily focused on flooding, such as
Given the program has been providing homeowners grants for a decade, researchers from the
* Lower insurance premiums: Fortified homes have 16% to 40% lower property insurance premiums.
* Higher resale value: Fortified homes sell for 6% to 7% more than other homes.
This is not a federal program, but a standard promulgated by a non-profit organization (IBHS) together with a state statute linked to insurance premiums and real estate market dynamics. The study's findings demonstrate that a homeowner can be incentivized to invest in hazard mitigation even in the absence of federal funding.
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Community-based catastrophe insurance
An innovative approach to boosting insurance purchasing that
The benefits of CBCI fall into three main areas: enhancing financial resilience; providing affordable coverage; and creating incentives for risk reduction at the community and individual levels (see Figure 1).
This type of program is flexible and can be created to cover a single hazard or a range of natural disasters for a given community, including flood, but also wildfire, earthquake, and others. Such broad applications can further incentivize a community's risk management efforts -- risk reduction, risk communication, and risk transfer -- across multiple perils. For flood risk, this could mean levee improvements and/or ecosystem-based interventions, including wetlands enhancements, and more.
Within broad parameters, CBCI has much flexibility in its structure and design, with varying degrees of community responsibilities possible (see Figure 2). These range from a facilitator model, where the community members contract with insurers, to a captive insurer, in which the community establishes and operates its own risk-bearing entity.
The roadmap to implementing a CBCI program will vary depending on the unique needs of a given project and community. That said, there are five basic components to implementing a program (see Figure 3): defining the need, determining the authority to act, engaging stakeholders, analyzing risk, and transferring the risk. It should be noted that these steps are not necessarily sequential, and there may be back and forth among them depending on local circumstances.
To facilitate these types of transactions it would be helpful for
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A CBCI pilot program: Boosting financial resilience in NYC neighborhoods
One benefit of community-based catastrophe insurance is the flexibility it allows in defining "community," which can be an agency or municipal government, a neighborhood association, a business improvement district, or any number of entities. The primary requirement is that the involved community has the authority to secure or facilitate insurance coverage on behalf of multiple properties.
The program is built on a parametric basis, described earlier. In the NYC program, payouts will be made to CNYCN for qualifying flood events based on a mix of satellite data; on-the-ground, real-time sensors; and social media images. Once a qualified event triggers the payment, homeowners will be able to apply for assistance -- on their own or with help from CNYCN's network partners. Qualified applicants can then receive a grant up to
The intent of these payments is to support residents and their broader communities in getting back to normal faster. It also will allow them to avoid having to make such tough decisions as whether to pay for home flood repairs versus other critical family needs, like healthcare, food, and saving for education.
We are proud to have helped kickstart this innovative program and hope it will cause other communities to establish their own CBCI program. Federal grant funding could be a catalyst here.
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A comprehensive flood resilience strategy
Given the scale and complexity of the challenges presented by flood risk, federal, state, and local officials need a clear vision that moves beyond unsustainable paradigms of protection and strikes a balance between addressing crises and fostering resilience. Insurance and risk transfer certainly have an important role to play, but must be combined with a broader, coordinated resilience strategy.
Ideally, insurance would be paired with risk reduction measures such as hazard mitigation, building codes adoption, enforcement, and retrofits, and as well as community resilience planning. While a few states (such as those mentioned earlier) have their own resilience grant programs, the preponderance of resilience grant funding is provided by the federal government.
For example,
Pairing these federal and/or state grants, with risk transfer solutions, such as supplemental flood insurance or CBCI programs, can be a force multiplier. We believe that CBCI projects, like the NYC pilot, demonstrates the value of risk reduction measures alongside the benefits of risk transfer. We would like to see
That said, CBCI and other private risk transfer programs could be more successful if disincentives baked into existing statutes and regulations are addressed. For example, the Stafford Act contains disincentives for homeowners and governments from purchasing insurance because
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Building codes and zoning laws
Local officials have significant influence over resilience of their communities because they can determine how and where residential and commercial structures are sited and built. This is best demonstrated through zoning and building code ordinances. By requiring that structures be sited outside of flood-prone areas or built to a higher elevation, local officials can reduce flood impacts to their communities. Adopting a flood-resistant building code has been shown to save
The insurance industry and other stakeholders should work with
In an era of escalating climate risks and evolving environmental challenges, the insurance industry is at a crossroads. As we witness the increasing frequency and severity of natural hazards like flooding, there is a pressing need for proactive measures to mitigate risks and safeguard the well-being of communities. Embracing the transformative power of retrofits in the built environment is not just a strategy for sustainable urban development; it is a vital step toward fortifying NFIP and private markets against the uncertainties of our changing world.
The built environment, ranging from residential homes to commercial properties, is inherently vulnerable to the impacts of flooding. Rising sea levels and extreme weather events pose significant threats, resulting in a surge in insurance claims and payouts. By prioritizing retrofits, we have an opportunity to not only reduce the frequency and severity of claims but also to foster a more resilient and insurable built landscape.
The insurance industry and
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Stafford Act incentives
We see the implementation of this provision as a significant opportunity to remove existing barriers to resilience investments and a strong incentive for communities to do the right thing before disaster strikes. However,
Similarly the Community Disaster Resilience Zones (CDRZ) Act of 2022 amended the Stafford Act to reduce the barriers to entry for vulnerable communities to apply for BRIC grants.
The CDRZs are areas that
While the additional funding in both the Public Assistance resilience measures and CDRZ funding would only materialize if a disaster hit a community, it provides a strong incentive for all communities to invest in resilience with the confidence that
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Engaging cross-industry stakeholders as co-beneficiaries of resilience investments
More broadly, other industries, such as finance and real estate, can incentivize further flood resilience investments together with the insurance industry and government.
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As summarized in its report findings, NIBS called out the utility of flood resilience incentives, in the context of co-beneficiaries from multiple industries and governments:
1. Mitigation saves, but it doesn't do so in proportion to individual stakeholder investments. Investment in disaster resilience makes financial sense for society -- but for individual stakeholders the cost can seem to exceed the benefits.
For example, the
But, to the homeowner paying the entire cost, the investment can seem hard to justify. (Building for flood resilience at the time of initial construction is less expensive and more cost effective, and it makes sense even when flooding occurs less frequently.)
2. Co-beneficiaries can share the cost of such investments -- but they face similar challenges to those of the property owner. In the
3. Public-private coordination is essential. Stakeholders' interest in addressing the misalignment of incentives is as evident as the complexity of the challenge itself.
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Conclusion
While the effects of flooding are felt most acutely in the communities where they occur, the human, economic, and social cost of flooding is felt more broadly. The ripple effects include supply chain disruptions, infrastructure failure, loss of crops, and hardship to the economy. Risk levels today are amplified by climate change, nature loss, and the concentration of people and assets in flood-prone areas. Conventional strategies are insufficient to address these rapidly changing risk levels, which is why we need a shift from a reactive to a proactive approach to flood resilience.
Closing the flood protection gap and improving flood resilience will require even more partnerships between governments and private industry. Together, the public and private sectors can improve community flood mitigation efforts and speed recovery following flood events.
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Appendix: Flood market overview
The National Flood Insurance Program
The NFIP is the main source of flood insurance in the US. Created in 1968 to address the lack of a private market for flood coverage, the NFIP is administered by the
Federally backed flood policies are available through the following two channels:
* The Write Your Own (WYO) program, a group of roughly 50 insurance companies that use their own licensed agents and producers and are authorized by
* NFIP Direct, which allows agents not appointed by a WYO insurer to write flood insurance directly through the NFIP.
Although a private flood insurance market has emerged since the NFIP's creation, it is small in comparison -- the NFIP accounted for more than 95% of household policies purchased as of 2018. While the number of private policies is likely rising, the NFIP will continue to dominate the market for the foreseeable future. Even with the current public and private market offerings, as much as 85% of American households lack flood coverage.
Various factors explain the poor uptake, including some evidence that expectations of government relief reduce demand. More fundamentally, property owners generally do not fully understand their risk and, more often than not, underestimate it.
For example, property owners often make a buy/don't buy coverage decision based on whether they are "in or out" of a Special
Property owners outside of SFHAs often consider themselves safe, but, of course, flooding is not confined to administratively defined locations. For example, almost three-quarters of
But the low uptake of flood insurance among households outside of SFHAs does not fully explain the protection gap. Even inside SFHAs, only 30% of homeowners are covered, despite a requirement that flood insurance be in place for federally backed mortgages in these areas.
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Private flood insurance
Interest by private sector insurers in underwriting flood risks continues to grow, due in large part to improvements in risk technology and analytics that enable insurers to better understand flood risks and exposures.
Types of private flood insurance currently available include:
Primary residential flood, which can mirror NFIP coverage terms or provide enhanced coverage for residential properties.
Commercial "all-risk" is a broad form of coverage designed for large businesses. It can provide protection for various property risks, including flood and business interruption. The amount of coverage available in these policies is typically much greater than in a flood-only policy. However, in recent years, we have seen greater underwriting scrutiny of flood in all-risk programs, and in some instances a deterioration of coverage for specific locations. This amount of coverage is usually unsuitable for small businesses and is not applicable to homeowners.
Excess flood coverage sits on top of underlying private primary coverage or an NFIP policy. Excess flood insurance is available to individuals and businesses, and can provide higher limits of protection as well as enhanced coverages such as additional living expenses and business interruption.
Contents-only coverage was highlighted by Hurricane Ian, which served as a reminder that anywhere it rains, it can flood. The vast majority of people renting homes, apartments, and condos did not have a contents-only flood insurance policy. While both the NFIP and private market offer renters policies, this highlights an opportunity to help renters with this type of coverage for their financial peace of mind.
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Agents as
Relationships matter in insurance, and agents often have strong connections with homeowners and businesses in their communities. Talking with clients about their flood exposure and ways they can manage the risk is a good way for agents to demonstrate their value and enhance those relationships. Torrent Technologies, a
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Original text here: https://www.banking.senate.gov/imo/media/doc/kaniewski_testimony.pdf
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