By Adam Yukelson and Pablo Freund Lanfranco
Earlier this year, we could count with our hands the number of New Yorkers seriously interested in the topic of flood insurance.
Most of them, in fact, were our colleagues: a team of graduate students at Columbia University’s Earth Institute, who spent a semester researching the potential for flood insurance markets to serve as a tool for risk mitigation from coastal flooding in New York City. The work was commissioned by the Mayor’s Office of Long Term Planning and Sustainability.
With an overwhelming majority of scientists projecting increases in the magnitude and frequency of extreme weather events, and after Hurricane Irene struck New York City in the fall of 2011, this was certainly of interest to the mayor’s office.
None of us, of course, could have imagined that less than six months after completing our study, New York City would experience its worst hurricane since its founding in 1624. The unprecedented storm brought water levels to 13.88’ at the Battery, smashing the record 11.2’ water level set in 1821 – crippling utilities, bringing the local and regional mass transit systems to a standstill, and leaving untold numbers of people to rebuild their lives.
Now, the event that was dubbed “Frankenstorm” has brought our research on flood insurance, disturbingly, to life.
As New York Gov. Andrew Cuomo acknowledged last Tuesday, “We have a new reality when it comes to these weather patterns; we have an old infrastructure, we have old systems. That is not a good combination.”
This is exactly why the flood insurance market, as a tool for change, is of interest to the mayor’s office, and should be considered more widely by other coastal cities. Replacing existing policy won’t be easy. But policymakers would be wise to examine the irreparable damage Sandy has brought to lives and possibly infrastructure, and use this moment to consider the alternative.
As a starting point, we offer the following picture of the current reality in the market for flood insurance:
Our research indicates that New York City, and other vulnerable areas throughout the United States, are significantly underinsured. Only half of homes in the flood-zones, such as Zone A in New York City (which was ordered to evacuate prior to the storm), are insured against flooding. Outside this zone, coverage drops to a mere 1 percent. The problem is that the designated flood-zones have not been updated in years, despite the Federal Emergency Management Agency’s continued effort to do so, and extreme weather events expected to occur every 100 years have become more frequent over the past years.
More importantly, since flood events affect large geographic areas, covering losses in one home with the premiums of other insurance clients in the area is impossible. Moreover, a market failure known as adverse selection occurs, driven by the fact that only those who perceive themselves to be most at risk purchase insurance, resulting in low participation in insurance programs. The result is an almost complete lack of flood insurance products offered by private insurance firms for residential properties. Due to this market failure, the federal government provided a “patch,” the National Flood Insurance Program.
The federally backed flood insurance program offers policies where no one else will, and extends subsidized premium rates to 1-in-5 policyholders. But this program is not without its pitfalls. One year policy maximums, low awareness of the program and slow progress with reforming building codes have hampered the National Flood Insurance Program from improving flood risk resilience, and since Hurricane Katrina, the program has carried an $18 billion deficit due to the magnitude of losses. The damage from Hurricane Sandy will surely to extend the deficit significantly.
As we see the pictures and listen to the stories of the devastation caused by Sandy, we are reminded that in New York City alone, more than 30,000 properties in the 100-year floodplain are uninsured for flood damage. On top of that, increases in the frequency of these catastrophic events will lead to mounting losses for the federal program, and discourage even more the participation of private insurers in this market.
We hope that our research can help policymakers in New York City and communities that face similar circumstances overhaul the flood insurance markets locally, regionally and perhaps nationally in order to effectively mitigate the growing risk evidenced by the catastrophic effects of Hurricane Sandy.
Rebuilding after the storm will be a long process, but the policies that incentivize the fundamental risk mitigating mechanisms must be rebuilt from the ground up in order for New York, and the countries’ vulnerable locations, to emerge with a more viable and resilient path to face nature in the future.
Our research has led to some very specific recommendations for policy makers:
- Conduct a detailed market analysis in order to determine the exact number of properties at risk, value at risk and number of insured properties.
- Educate the public about the risk of flooding and the availability of insurance.
- Improve local government’s cooperation with NFIP program and integrate flood resiliency standards to building code.
- Engage the reinsurance industry to activate the private market for flood insurance products and overcome market failures.
- Explore the use of catastrophe bonds.
To access the full report, follow the link (pdf).
Adam Yukelson, a graduate of the M.S. Sustainability Management program ’12, is working on a variety of projects aimed at generating societal well-being in the face of disruptive change. Pablo Freund, a graduate of the MSc Sustainability Management program ’12, is managing director of the Buckminster Fuller Institute, working to promote design science to solve humanity’s most pressing problems.