A national policy for disasters

January 2, 2007

This op-ed appeared Jan. 2 in The Miami Herald.

By: Robert H. Jerry II, James M. Loy and Steven E. Roberts.
Robert H. Jerry II is dean of the Levin College of Law at the University of Florida, James M. Loy is former commandant of the Coast Guard and Steven E. Roberts is an attorney at Alston & Bird.

Despite ominous predictions that this hurricane season would rival last year’s onslaught of killer storms, the season ended quietly on Nov. 30. The lessons of Hurricane Katrina, however, require us to plan for what lies ahead. Unfortunately, Congress has failed to enact comprehensive catastrophe legislation to prepare for and respond to the worst Mother Nature has to offer.

When disaster strikes, those affected turn to insurance to provide the financial resources to pick up the pieces. If all goes according to plan, the insurance company compensates the victims according to the terms of the insurance policy.

Theory vs. reality

Because the magnitude of loss does not exceed the premiums collected, the company individually — and the insurance industry collectively — can afford to pay claims and make a profit. To do this, insurance companies limit their financial exposure through risk diversification that correctly assumes that not all customers will experience the same loss at the same time. Reinsurance — which is essentially insurance for insurance companies — further enhances financial solvency by distributing some of the risk even more widely.

But what happens in theory and what has happened in reality could not be more different: Residential and commercial development, rising population densities and escalating land values have created a recipe for disaster. Estimates suggest that a repeat of the 1900 Galveston hurricane and 1906 San Francisco earthquake would cause losses in excess of $36 billion and $400 billion respectively. If a Category 5 hurricane were to hit Miami, losses would top $50 billion. Because claims would greatly surpass premiums and retained dollars, some insurance companies will default.

Floridians are all too familiar with this scenario. Following Hurricane Andrew in 1992, 10 insurance companies went bankrupt. This summer, driven to financial insolvency by the explosion of claims caused by 2004 and 2005 hurricane seasons, another Florida insurer, which was once the state’s third largest, declared bankruptcy.

Mortgage defaults

And Floridians are not alone. Homeowners from Texas to the Carolinas either cannot obtain insurance coverage or must pay astronomical premiums for coverage that is much more limited than before. For homeowners who simply cannot afford it, a major hurricane spells financial disaster and virtually guarantees unprecedented mortgage defaults. The effect on the national economy would be pronounced and long-lasting.

A national catastrophe fund would offer a level of protection from catastrophic hurricanes and other mega-disasters. Under proposals considered, but not passed by Congress in 2005 and 2006, the federal government would offer catastrophe reinsurance to qualifying state governments. This, in turn, would help ensure the availability and affordability of property insurance in high-risk areas while establishing a reserve fund to cover the losses when all else fails.

Yet insurance is only one component of a forward-looking national-catastrophe policy. Mitigation measures — such as stronger building codes and land-use regulations — soften the impact of natural disasters. A study by Louisiana State University’s Hurricane Center estimated that if four specific mitigation measures had been in place before Hurricane Katrina — including the installation of hurricane shutters and hurricane straps — 75 percent of the estimated losses could have been avoided. Similar arguments have been made for earthquake prone areas. For existing homes and businesses, tax credits to retrofit construction with stronger materials and safety measures are needed.

Timing unkown

When lawmakers return to Capitol Hill in January to tackle complex issues ranging from Iraq to healthcare, the opportunity to create a comprehensive natural-catastrophe policy must not be wasted. The 2006 hurricane season passed with a whimper, but the 2007 season is only six months away. The timing of future natural disasters is unknown, but that they will occur is absolutely certain. Now is the time to prepare a comprehensive, cohesive and coordinated national policy to deal with them.