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As vote looms, report finds insurance unprepared for climate challenges

Evan Lehmann, E&E reporter
Published: Tuesday, June 26, 2012

The nation's flood insurance program faces a "looming climate deficit" that threatens to burden taxpayers with the cost of repairing homes that are damaged by heavier downpours and rising oceans.

That assessment by the Center for Climate and Energy Solutions (C2ES) comes as the Senate prepares to hold votes today on a package aimed at reforming the National Flood Insurance Program, which safeguards 5.6 million policyholders with $1.2 trillion in property value exposed to water damage.

The legislation seeks for the first time to instruct federal officials to incorporate potential impacts from climate change into the way the program maps floodplains and calculates the likelihood of inundation. But the competing House bill, which was passed last summer, makes no mention of global warming and its orbiting impacts related to hurricanes, higher seas and intensifying rainfall.

Without those considerations, the sprawling program is increasingly threatened by the possibility of paying for future flood damage with premiums that are based on yesterday's catastrophes. In other words, there might not be enough revenue to pay for damage claims, leaving taxpayers to provide emergency funding after floods, said Dan Huber, a fellow at C2ES.

"I think the most important message is that the program currently has been unable to cover the full spectrum of risks it covers and that these risks are only expected to increase as the climate continues to change," Huber said.

The flood program dove into debt after a series of levees in New Orleans failed during Hurricane Katrina in 2005, flooding sections of the city and saddling the program with about $18 billion in claims that taxpayers have so far paid for. Neither bill in the House or Senate proposes to forgive that debt.

The analysis by C2ES suggests that the taxpayer bailout of the flood program in 2005, combined with its suppressed rates that often fail to match the real-world risk of flood, represents a "massive taxpayer subsidy to at-risk homeowners."

"Looking forward, the risk of further losses only increases, as demographic trends place more infrastructure in harm's way, watersheds are developed and climate change increases flood risk over time," the report says.

Higher rates, stronger buildings needed

To discourage runaway development in dangerous areas, the flood program needs to raise its rates, encourage flood-resistant building practices and expand its base of policyholders, it says. But those aspirations can collide. There's widespread concern that if rates rise, enrollment in the program will drop.

To prevent that, Huber suggests that the flood program could replace one-year insurance contracts with long-term contracts that may last 30 years. That would dissuade policyholders from buying flood cover in starts and fits. It could also help facilitate the use of government loans to harden homes against flood damage.

But there are challenges. Setting one rate for 30 years is hard to do, especially if climatic impacts begin to intensify.

"Long-term contracts are difficult to price, and therefore insurers are forced to be conservative (expensive), potentially undermining the uptake of policies in the first place," the report says.

The legislation in both chambers calls for increased rates. The Senate bill seeks to give the Federal Emergency Management Agency, which runs the program, authority to raise premiums 15 percent per year, up from the current 10 percent. The House would grant a 20 percent rise.

Other improvements in the legislation require FEMA to establish a reserve fund and clarify the agency's ability to buy private reinsurance, which could shift severe catastrophes, like Katrina, to global underwriters.

Huber believes the purchase of reinsurance could incorporate the costs of climate change. That price signal, which global reinsurers may be including in their coverage, would be passed on to policyholders. As a result of higher flood insurance costs, people would make better decisions about where to build homes, while alleviating the burden on taxpayers after a storm strikes.

One of the cheapest ways to address damage is by preventing it through "mitigation," many experts say. The flood program has tried to increase its efforts, with mixed success, to buy homes that are repeatedly inundated. It tears them down and leaves the property undeveloped.

"Mitigation is even more important when considering the climate-related risk of increased hurricane intensity and relative sea-level rise," the report says, pointing to an analysis by Lloyd's of London indicating that losses in 2030 could be diminished to present-day damages, even with sharper climate impacts.

"Therefore, maintaining the long-term fiscal solvency of the NFIP is feasible, but only with a combination of increased participation in the program, accurate risk-based pricing, and much more aggressive mitigation of flood risk," the C2ES report says.

Reprinted from ClimateWire with permission from Environment & Energy Publishing, LLC. 202-628-6500


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Reprinted from ClimateWire with permission from Environment & Energy Publishing, LLC. 202-628-6500.

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