Hurricanes and Other Public Disaster Risk Outcomes

Nuclear energy is not the only issue in public policy and residual risk.  One big public risk issue in the US has been the evolving balance between the insurance industry, government programs, and development along the US Golf Coast.

Big dollars are at stake.  Estimated costs for the largest US hurricane losses, all of which have been in the last 20 years: Katrina at $170B,  Harvey at $131B, Maria at $94B, and Sandy at $74B.  Not a coincidence that all four of these made landfall near major metro areas and all were relatively recent.

These record losses are not necessarily because these hurricanes were stronger than large past hurricanes, or that we were unlucky in where they made landfall.  A main factor is the escalating property values in coastal regions.  The Miami region for example has appreciated 102% over the last ten years and almost 200% since 2000.

In the US system, flood risk is covered by the National Flood Insurance Program, but wind and rain damage are specifically left to the private insurance sector to cover.  Since many insurance prospects are not well-versed in the details of coverage, there are often gaps in coverage/understanding and surprised when a peril materializes, leading to high costs, unaffordable claims remediation, and litigation.  Estimates of the percentage of homes in Houston that were uninsurable flood losses range as high as 70% of affected homes.  Damage sources are often unclear or blended, leading to additional disputes about wind vs. flood coverage and loss cause, which inflates systemic costs even further.

Some public policy is aimed at reducing or mitigating these risks.  Building codes are much stricter in many Gulf coastal regions, mandating hurricane mitigation tools like storm shutters.  Public works like levees, windbreaks, and shoreline management measures can help manage flooding.  These systems are often left to local jurisdictions, however, leading to knock-on effects: one town's levee merely moves the flood water to another town.  As a result, flood modeling and prediction is complex and prone to error.  Catastrophe modeling to predict and manage hurricane risks are compute-intensive, proprietary, and prone to misestimating.

Given this complexity and the generally fractious state of US politics, all of this is managed with little regard for risk.

Insurance can have significant personal costs -- the average homeowner's policy in Florida is over $3000 a year and that does not include flood or windstorm coverage, purchased separately at $1000+ each.  This is a major expense for a lower-income household budget, and these households are often forced by housing costs to live in more flood-prone areas.

The political reaction to this has often been to mandate market rates, either through subsidy or by forcing insurance rates down.   But this runs up against insurance regulatory bodies, managed at the state level in the US, who must also manage insurer solvency to ensure claims will be covered -- and often also run a state-funded insurance entity as an insurer-of-last-resort when insurers are forced to leave the market by a combination of artificially low rates and solvency requirements.  At one point Citizens PIC, Florida's insurer-of-last-resort fund, held 40% of all property risk in the state.  At this level the state risk may become unmanageable, where significant or repeat hurricane losses in a year may threaten the state's finances as a whole.  Well-meaning measures such as a 10% cap on rate hikes in Florida, coupled with large claims payouts and reinsurance hikes, imbalance the system even further.

The real problem is the "hidden cost" of hurricane risk, which inevitably creates moral hazard.  If risk is not effectively priced, it incentivizes building that is not sustainable economically in the long run, as evidenced by comparing photos of Miami Beach now and 10 or 20 years back.  The problems are getting worse, with overbuilding now exposed to land settling / sea rising and associated flood risks... even ground flooding on sunny days in the Miami area.  Public demand to "do something" will only result in throwing good money after bad with stopgap measures like dam projects.  Venice tried that and it has not worked well so far... and that was for a unique tourist draw and UNESCO World Heritage Site.  It might be easier to just move the South Beach clubs.

The ultimate need is for politicians to recognize the need to price risk appropriately.  In some cases that even means stopping rebuilding, which the US is seeing more of in recent years. In the aftermath of Katrina, the very worst flood-risk neighborhoods were not rebuilt.  And support has been increasing for mandating tougher building and reimbursement rules when disaster does strike, to avoid repeating the same mistakes.

Our political systems should make sure those who can shoulder the load of risk management are able to do so.  There may be need to help the poor relocate after hurricanes and other natural disasters, vs. rebuilding homes doomed to further problems.  But we need to do so with a clear view on risk.  There's no reason to keep subsidizing penthouse condos and beach houses in glitzy coastal enclaves.