Judgement call - when does disaster become normal?

I ran across this article in the Orlando Business Journal - Drought disaster loan deadline approaches.

So I'm wondering, if the climate actually changes in a place and drought becomes the norm, when does the government decide that the losses due to drought are no longer a disaster? Same with flooding - if the hundred-year flood becomes the 2-year flood, does flood insurance still work?

Should be interesting to see how such matters are handled in the future.

More Questions About Insurance

Three years ago, a year before Katrina, Florida got the wake-up call that began a transformation in the way homes there are insured against catastrophe.

On the Insurance Journal site, Cecil Pearce, vice president of the Southeast region for the American Insurance Association, put it this way:

Hurricane Andrew, with $15 billion in insured losses -- threw Florida's property insurance market into chaos, many carriers discovered they had miscalculated their exposure to large weather-related losses.

Many homeowners faced higher rates and fewer options for coverage. Insurers tried to spread their risk over larger areas with less hurricane exposure. Pearce describes “A severe imbalance between the need for insurance and the industry's capacity to provide it.”

But Andrew did not slow the settling of Hurricane Alley and no laws were passed to limit such exposure. After all, Florida’s coastline is its main attraction for new residents and the travel industry. So now insurance is provided as a shared risk between insurance companies, the state and the homeowner. This is not, however, a comprehensive answer to the risk of storm damage and destruction. Another Andrew – given the continued build-up along the coast – could still bankrupt all of the provisional insurance sources.

For everyone whose home is at risk now or may be in the future due to the impacts of climate change, following the thinking of insurance providers is key for several reasons:

• They are experts in risk assessment. On the ground, that’s what we all wonder – “What are the odds that I’m going to be affected by the forecasted impacts?”
• People pay insurers so that they can recover or rebuild lost property due to catastrophe. Policy holders trust that they’re covered in case Nature clobbers their homes with wind, fire, flood or earthquake. Insurers, though, are constantly re-evaluating the risks associated with that coverage.
• Policy holders may not be covered as well as they think. Those re-evaluations are leading to cancellation of policies in many locations where the risk is seen as too great for continued coverage.
• We all need to know how to respond to the new reality where our locations disqualify us from insurance coverage or when high deductibles and premiums force us to make the choice of whether or not to pay for policies.

Government at both the state and federal levels understands that any region where insurance coverage for expected catastrophe is denied or is unaffordable to the residents is a ticking time bomb. We have the aftermath of Katrina to look at as an example.

Assuming that you can afford the insurance for your most likely disaster, you’d follow the advice of someone like Liz Pullium Weston in this column on MSN’s MoneyCentral page. Read it and you’ll see that unless you can afford to put plenty of money away in your own insurance reserve, there are no guarantees that your coverage will replace your losses.

This is where FEMA would be expected to step in. I know; hold your laughter. But more effective federal support for disaster insurance is being discussed in Congress, which brings up a moral question.

As the New York Times opened its lead editorial yesterday:

There is impeccable logic to the argument that taxpayers should not be made to pay for the risks incurred by people who choose to live along a hurricane-prone coast or atop a major geological fault.

It then noted that 50 percent of Americans live within 50 miles of a coast, and thus are vulnerable directly or indirectly to the damage of hurricanes and sea level rise. At some point, as climate change advances and shows itself, many of those residents may no longer be able to buy or afford insurance.

Since Hurricane Katrina — which caused a record $50 billion in insured losses — private insurers have jacked up premiums as much as they can and, when barred from raising prices, dropped coverage of riskier homes.

Many of these companies, which have turned denying valid claims into an art form, deserve little sympathy and certainly no government subsidies. Still, taxpayers would end up picking up the tab through federal disaster relief if millions of homeowners lost their insurance or decided to drop it due to high premiums.

If, as the editorial continues, the reality remains that we all stand to pay for uninsured losses one way or another, it seems that insurance companies may be let off the hook and relieved of their own risk. That would seem to also relieve them of the responsibility to deliver objective risk assessment - the single most valuable product of their expertise.

Insurance Companies Rewriting the Future

In Spike Lee's heartbreaking retrospective of Hurricane Katrina, When the Levees Broke: A Requiem in Four Acts, we hear the angry laments of survivors who were denied insurance benefits for damage because - their carriers claimed - water damage was not covered in their policies.

Katrina was an exceptional event in the universe of risk management that is the domain of insurance companies, and when it comes to compensation, the insurance company is the final interpreter of its own policy language. For an event as huge as Katrina, a policy for protection from hurricane damage may be interpreted as specific to the effects of high wind, excluding the accompanying storm surge or torrential rains. Insurance adjusters on the ground are given their marching orders and scripts, while policy holders are left standing dumfounded and incredulous to deal with the total losses of their homes and property.

As one New Orleans resident put it, "There is a special place in Hell for these insurance adjusters." This is the reality we're looking forward to. You may not be "in good hands" after all. Insurance companies are about showing profit to shareholders; they are not sentimental, nor are they altruistic. As this blog has reported here and here, insurers are reassessing their assessment methods to prevent losses in an increasingly threatening environment. [This is not meant to be an indictment of all insurance adjusters, who, when it comes down to it, have their hands tied by policies from on high. See comments posted to this article.]

A column in the Washington Post describes one upside of the rising alarm among insurance companies - their joining the chorus demanding immediate reduction of worldwide greenhouse gas emissions.

Ten years ago, Peter Levene, chairman of Lloyds of London, was skeptical about global warming theories, but no longer. He believes carbon emissions caused by human activity are warming the Earth and causing severe weather-related events. "At Lloyds, we feel the effects of extreme weather more than most," he said in a March speech. "We don't just live with risk -- we have to pick up the pieces afterwards." Lloyds predicts that the United States will be hit by a hurricane causing $100 billion worth of damage, more than double that of Katrina. Industry analysts estimate that such an event would bankrupt as many as 40 insurers.

Lloyd's has warned: "The insurance industry must start actively adjusting in response to greenhouse gas trends if it is to survive." The Association of British Insurers has called on governments to "stem ominous weather related trends" by cutting carbon emissions. U.S.-based companies AIG and Marsh -- respectively, the largest insurer and broker -- have joined with other corporate leaders to urge Congress to reduce U.S. greenhouse gas emissions 60 to 80 percent by mid-century. AIG's policy statement on climate change "recognizes the scientific consensus that climate change is a reality and is likely in large part the result of human activities that have led to increasing concentrations of greenhouse gases in the earth's atmosphere."

Good for them, but meanwhile for all localities with vulnerability to climate change impacts, this stands as a major issue, for as risks rise for damage or destruction from storms, floods, wildfires, drought and sea level rise, we know that insurance companies are making their adjustments in advance. They are taking their place - consistent with their profit-oriented mission - in the vanguard of climate change risk management.

Of course, this means that policy holders and buyers must begin to examine the small print with even more care and scrutiny than before. Insurers understand that a direct hit by a Katrina-like storm on a location like Miami could bankrupt them if every potential claim is filed. This creates even more incentive for property owners to protect themselves proactively and defensively.

So get more involved in local mitigation activities - reduce your local eco-footprint, pressure your local government to take protective measures addressing the threats that apply to your area, and finally, improve your property's survivability in the face of those threats. Don't rely on your insurance policy to save you. And as part of that, start putting together your local adaptation strategy. Reduce your community's risk level wherever you can.

The insurers are assessing

As they say on the Climate and Insurance Web site,

The National Association of Mutual Insurance Companies has created this website as a resource for industry professionals to learn more about climate change and its possible implications for the property/casualty industry.

The site does not take a position on the scientific controversy of the causes (including whether global warming is to blame) for the increase in natural disasters around the world.

The site posts news releases and stories that come more from the policy and scientific side, rather than reports of actual disasters and obliquely related information as Climate Frog (also) presents. In the developed world - where "insurance" is something you buy - the information provided by ClimateAndInsurance is relevant. Not so much in places like Bangladesh and Sudan.

But like Climate Frog, ClimateAndInsurance hopes to learn by watching the news trends.

Insurers React to Flood of Flooding

An extraordinary flood or extreme weather event in one location may be a disaster, but repeated extraordinary flooding across many locations may be regarded as evidence that something's going on that deserves not only attention, but also action.

Reuters gathers some of the news threads and finds that the people who may serve as the developed world's "economy scouts" - insurers - are finding justification in recognizing climate change for the threat that it is.

Floods killed more than 7,000 people in the world last year, a recent study by reinsurance group Swiss Re study showed -- roughly a third of all victims of natural catastrophes such as storms, earthquakes, droughts and extreme cold or heat.

Statistics gathered by insurers -- who look at the cost of a catastrophe to measure its severity, not the death toll -- also indicate climate is changing.

"One single event can never be a sign of climate change," said Jens Mehlhorn, who heads a team of flood experts at the Zurich-based company.

"But when you see a series of such events, and that's what it looks like at the moment ... it may be about time to say something is changing," he said.

This year's UK floods were an event statistical models say should happen once only every 30 to 50 years, Mehlhorn says: the floods in 2000 were a 25-30 years event.

Two such events in only seven years are not statistically impossible, but they are unlikely. Other countries have seen similar increases in such disasters.