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FEMA Reauthorization Session Highlights Importance of Risk Transfer and Reduction

If there was a recurring theme in last week’s Senate Banking Committee hearing on reauthorization of FEMA’s National Flood Insurance Program (NFIP), it was the need for:

  • Congress to reauthorize NFIP, and
  • Communities, businesses, and government at all levels to invest in mitigating flood risk and in improving resilience.

It’s important to amplify this message, especially in light of a recent proposal by Rep. Adam Schiff that would, among other things, disband NFIP and require property/casualty insurers to provide “all-risk policies” based on coverage thresholds and rating factors dictated by a board in which the insurance industry is only nominally represented. Last year’s budget uncertainty – in which a potential government shutdown was threatened – left open the very real possibility of funding for NFIP expiring if Congress failed to reach a deal.

“Federal policies and programs, including NFIP, are essential,” said Daniel Kaniewski, managing director, public sector, for Marsh McLennan in his testimony. “But all disasters are local, and so too are resilience investment decisions.”

Before joining Marsh McLennan, Kaniewski was the second-ranking official at FEMA, where he was the agency’s first deputy administrator for resilience.

“To increase the resilience of communities against the pervasive risk of flooding,” Kaniewski testified, “we believe that risk transfer— including from the NFIP, private flood insurance, reinsurance, and parametric insurance — should be paired with risk reduction.”

In this regard, Kaniewski emphasized NFIP’s Community Rating System (CRS), which encourages and rewards community floodplain management practices that exceed the NFIP’s minimum requirements. He cited Tulsa, Okla., as one of two U.S. communities to have achieved the highest CRS rating (the other is Roseville, Calif.), making residents eligible for the program’s greatest flood insurance discount of 45 percent.

Even without achieving the maximum rating, citizens save on flood insurance when their communities invest in resilience. For example, Miami-Dade County, Fla., recently became the latest jurisdiction in the hurricane- and flood-prone state to benefit from CRS program. The county’s new Class 3 rating will result in an estimated $12 million savings annually by giving qualifying residents and business owners in unincorporated parts of the county a 35 percent discount on flood insurance premiums.  

Last year, 17 other Florida jurisdictions achieved Class 3 ratings. In Cutler Bay – a town on Miami’s southern flank with about 45,000 residents – the average premium dropped by $338. Citywide, that represented a savings of $2.3 million.

Unfortunately, only 1,500 communities nationwide participate in CRS, underscoring the importance of awareness-building, education, and collaboration.

Kaniewski also highlighted the opportunity presented by community-based catastrophe insurance (CBCI), which uses parametric insurance to provide coverage to local government entities that wish to cover a group of properties. Such programs enhance financial resilience by simultaneously providing affordable coverage and creating incentives for risk reduction.

“Our recent CBCI pilot in New York City was developed in partnership with the City of New York and several nonprofit and insurance industry partners and funded by the National Science Foundation,” Kaniewski said. “It provides a level of financial protection for low-to-moderate-income households that previously lacked flood insurance.”

Kaniewski called on other industries – such as finance and real estate – to encourage flood resilience investments, along with the insurance industry and all levels of government. He cited the recent roadmap for resilience incentives issued by the National Institute of Building Sciences (NIBS) – funded by Fannie Mae and co-authored by representatives of a cross-section of “co-beneficiary industries” – that focused on residential structures prone to flooding. Triple-I subject-matter experts were co-authors on the NIBS project.

Sen. Tim Scott of South Carolina, committee co-chair – along with Sen. Sherrod Brown of Ohio – spoke from the perspective of a former insurance professional who has sold flood insurance about his state’s recent investment in mitigation.

“In 2023, the state’s budget included significant funding for mitigation efforts that would reduce flood damage from future storms,” Scott said.“Backing up that investment, the South Carolina Office of Resilience released a nationally praised Statewide Risk Reduction Plan, identifying the communities most vulnerable to floods and targeting mitigation resources to protect those residents. These are local solutions to local challenges – and they will make a huge difference in the lives of South Carolinians.”

While solutions that work in South Carolina might not work in other states, Scott said, “I’m confident that similar, locally based solutions and approaches could make a huge difference.”

Sen. Katie Britt of Alabama invited Kaniewski to elaborate on her state’s Strengthen Alabama Homes program, which provides grants and insurance discounts to homeowners who make qualifying retrofits to their houses. Britt cited research that found the program had “directly resulted in lower insurance premiums and higher home resale values.”

Kaniewski spoke in detail about Alabama’s efforts, including Strengthen Alabama Homes – which, he pointed out, is now being emulated by other states, including hurricane- and flood-prone Louisiana. He also cited by name the author of the research Britt referenced – Dr. Lars Powell, executive director of the Alabama Center for Insurance Information and Research at the University of Alabama and a Triple-I Non-resident Scholar – for producing “the first study that I’ve seen that gives empirical data — real evidence that mitigation pays.”

Steve Patterson, mayor of Athens, Ohio, described a range of nature-based solutions his city has taken – from rerouting the Hocking River, which runs through the middle of the city, to removing invasive plants and restoring native trees along the bank.

“That’s been very effective in reducing flooding in different neighborhoods throughout the city,” Patterson said. “There are a lot of things cities and villages can do.”

The work done by Athens – like green infrastructure work by the Milwaukee Metropolitan Sewerage District in Wisconsin and municipal entities – offers opportunities to reduce flood risk while improving quality of life for citizens. But, as Patterson points out, not all municipalities have the financial capacity to engage in such projects.

That is where the engagement of co-beneficiaries of resilience investment as partners becomes so crucial.

Learn More:

Triple-I Issues Brief: Flood

Miami-Dade, Fla., Sees Flood Insurance Rate Cuts, Thanks to Resilience Investment

Milwaukee District Eyes Expanding Nature-Based Flood-Mitigation Plan

Attacking the Risk Crisis: Roadmap to Investment in Flood Resilience

Proposed Flood Zone Expansion Would Increase Need for Private Insurance

FEMA Incentive Program Helps Communities Reduce Flood Insurance Rates for Their Citizens

FEMA Names Disaster Resilience Zones, Targeting At-Risk Communities for Investment

Shutdown Threat Looms Over U.S. Flood Insurance

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Cellphones Leading Cause of Distracted Driving; Telematics Can Help

By Max Dorfman, Research Writer, Triple-I

Distracted driving—which has significantly increased since the coronavirus pandemic—is most significantly affected by cellphone use, according to a new Issues Brief by Triple-I.

The report, Distracted Driving: State of the Risk, states that cellphone use–which includes dialing, texting, and browsing–was among the most ubiquitous and highest-risk behaviors found in governmental and private sector studies. According to a 2022 national observational survey from the National Highway Traffic Safety Administration (NHTSA), a total of 2.5 percent of drivers stopped at intersections were talking on hand-held phones at any moment during the day in 2021.

The brief also found that the U.S. personal auto insurance industry’s combined ratio—a measure that represents underwriting profitability—increased dramatically from 2022, to 112.2. A combined ratio below 100 indicates an underwriting profit, while one above 100 indicates an underwriting loss.

“As drivers returned to the roads following the pandemic, distracted driving surged, causing higher rates of accidents, injuries, and deaths. This high-risk behavior has worsened in the years since, having huge implications for the insurance industry and their policyholders,” stated Dale Porfilio, chief insurance officer, Triple-I.

The report notes that telematics and usage-based insurance can potentially help insurers—and their policyholders—better understand a driver’s risk profile and tailor auto insurance rates based on individual driving habits.

Indeed, according to an Insurance Research Council survey in 2022, 45 percent of drivers said they made significant safety-related changes in how they drove after participating in a telematics program. An additional 35 percent stated that they made small changes in their driving behavior. Policyholders became more comfortable with having their insurer monitor their driving behavior when it resulted in potentially lower insurance costs during the onset of the pandemic.

“If telematics can influence drivers to change behaviors and reduce the number of accidents, the nation’s roadways will be safer and auto insurance can be more affordable,” Porfilio concluded.

Learn More:

Facts + Statistics: Distracted driving | III

Louisiana Still Least Affordable State for Personal Auto, Homeowners Insurance

Surge in U.S. Auto Insurer Claim Payouts Due to Economic and Social Inflation

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Miami-Dade, Fla., Sees Flood-Insurance Rate Cuts, Thanks to Resilience Investment

Miami-Dade County, Fla., has become the latest jurisdiction in the hurricane- and flood-prone state to benefit from participation in FEMA’s Community Rating System (CRS) – an incentive program that recognizes and encourages  floodplain management practices that exceed the minimum requirements of FEMA’s National Flood Insurance Program (NFIP).

The county’s new Class 3 rating will result in an estimated $12 million savings annually by giving qualifying residents and business owners in unincorporated parts of the county a 35 percent discount on flood insurance premiums.  

“This is a huge step forward in resilience for our county,” Miami-Dade County Mayor Daniella Levine Cava said after FEMA announced that Miami Dade had leaped ahead two rankings in the flood-risk rating. “It indicates that we have been able to demonstrate that we can create more resilience, more protection for our community.”

Miami-Dade County has invested $1 billion in stormwater infrastructure over the past 33 years since the inception of the county’s stormwater utility. Under Mayor Levine Cava’s administration, the county has planned to invest an additional $1 billion in stormwater infrastructure. In the past two years, the county has accelerated projects to upgrade Miami-Dade’s infrastructure and implement critical flood mitigation activities. 

Last year, 17 Florida jurisdictions achieved Class 3 ratings. In Cutler Bay – a town on Miami’s southern flank with about 45,000 residents – the average premium dropped by $338. Citywide, that represented a savings of $2.3 million.

Over 1,500 communities nationwide participate in the CRS program, but only Tulsa, Okla., and Roseville, Calif., have taken sufficient steps to achieve Class 1 status and have their citizens receive the greatest premium discount of 45 percent. Both of these communities previously experienced disastrous flooding. Tulsa spent decades developing and implementing stormwater management improvements before receiving its Class 1 designation in 2022.

About 90 percent of all U.S. natural disasters involve flooding. Whether related to coastal and inland inundation due to hurricanes, extreme rainfall, snowmelt, mudflows, or other events, floods cause billions of dollars in losses each year.

As reported in a recent Triple-I “State of the Risk” Issues Brief, flood is no longer an “untouchable” risk for private insurers. For decades, the federally run NFIP was the only place where homeowners could buy flood insurance. But improved data, analysis, and modeling have helped drive private-sector interest in flood risk.

That’s good news for homeowners who understand the evolving nature of this peril, especially as FEMA’s new pricing methodology – Risk Rating 2.0 – applies more actuarially sound pricing to make NFIP’s premium rates more equitable. As NFIP rates become more aligned with principles of risk-based pricing, some policyholders’ prices are expected to fall, while many are going to rise.

CRS provides one avenue for communities to help their citizens get lower rates while proactively reducing flood risk.

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Chubb Highlights Perils Keeping High-Net-Worth People Awake at Night

According to a recent Chubb survey of 800 high-net-worth individuals in the United States and Canada, 92 percent are concerned about the size of a verdict against them if they were a defendant in a liability case – yet only 36 percent have excess liability insurance.

When it comes to liability, Chubb says respondents are most worried about auto accidents, allegations of assault or harassment, and someone working in their home getting hurt. Damage awards are rising dramatically for a number of reasons, according to Laila Brabander, head of North American personal lines claims for Chubb.

“Economic damages historically were based on factors such as the extent of an injury and resultant medical expenses or past and future loss of income,” she said. “But we are seeing a rise in non-economic damages, such as pain and suffering and post-traumatic stress disorder, that overshadow actual economic losses.”

Brabander described a case in which a client at a yoga studio fell onto the person next to her and was sued by the injured party for pain and suffering.

“The same plaintiffs’ tactics to encourage large verdicts in commercial trucking, auto liability, product liability and medical malpractice suits are now being utilized to push for larger jury awards against our high-net-worth clients,” Brabander said.

Another factor driving up the cost of settlements is the third-party litigation funding, in which firms  provide funding to plaintiffs and their lawyers in exchange for a percentage of the settlement. These private-equity firms began in the commercial space and are now funding lawsuits against individuals and their insurers.

High-net-worth people also are deeply concerned about the threats posed to their homes by extreme weather and climate-related events. Much of this concern may be due to increased development in coastal areas vulnerable to tropical storms and flooding and in the wildland-urban interface – areas in which development places property into proximity with fire-prone wilderness (see links below).

Chubb’s findings are based on a survey of 800 wealthy individuals in the United States (650 respondents) and Canada (150 respondents). Respondents had investable assets of at least $500,000, with the majority reporting assets of $1.5 million to $50 million and 12 percent reporting assets of more than $50 million.

Learn More:

Triple-I Issues Brief – State of the Risk: Wildfire

Triple-I Issues Brief – State of the Risk: Hurricanes

What Is Third-Party Litigation Funding and How Does It Affect Insurance Pricing and Affordability?