One after another, the hurricanes rumbled through: Harvey, Irma,Maria, Nate.

Each new storm during the tumultuous hurricane season of 2017served as a reminder not only of the expensive and often tragicrealities wrought by climate change, but also of the glaring needin the property/casualty insurance world to find a sustainableformula for financing disaster risk — one that protectsthe interests of insurance companies, government agencies and, ofcourse, the people and businesses whose lives and property arethreatened by natural disasters.

In the first nine months of 2017 alone, the United Statesexperienced $15 billion weather and climate disasters, just shy ofthe record set in 2011, according to the NOAA NationalCenters for Environmental Information (NCEI) U.S. Billion-DollarWeather and Climate Disasters (2017). The recent spate ofstorms underscored the fundamental shortcomings of the currentapproach to financing disaster risk in the U.S., and particularlythose of the National Flood Insurance Program (NFIP), thedebt-ridden federal program that is currently up forreauthorization by the U.S. Congress.

Early estimates indicate that 2017 could rival 2005, the yearHurricane Katrina decimated the Gulf Coast, as the costliesthurricane season ever recorded. In September, Roy E. Wright, whoheads the NFIP, said payouts to insured homeowners for HurricaneHarvey alone could reach $11 billion, making it thesecond-costliest storm in the history of the program. Damage fromhurricanes Irma and Maria are bound to push that number muchhigher.

Prior to the storms, the NFIP was already $25 billion indebt.

But as high as the payouts, and the additional debt burden forNFIP, will be, those figures pale in comparison to the hundreds ofbillions of dollars of estimated property damage caused by thestring of storms. That only a small fraction of the damage will becovered by insurance payouts speaks to one of the fundamentalproblems with the current approach to disaster financing: thecoverage gap and low take-up of flood insurance in hurricane- andflood-prone places like Florida, Texas and Puerto Rico. Forexample, only about 20% of residential property owners in Houstonhad flood insurance coverage when Harvey hit in late August, whileonly 2% of residential property owners in Puerto Rico had floodinsurance coverage when Maria struck the island three weeks later,according to Carolyn Kousky, director of policy research andengagement for the Wharton Risk Center at the University ofPennsylvania in Philadelphia.

The storm season of 2017 “certainly reinforced a lot of issuesthat have been building [with disaster risk financing in generaland NFIP in particular],” says Kousky. “The NFIP was never designedto cover disasters like the ones we've experienced in 2017.”

The string of storms appears also to have supplied new momentumto efforts to find a sustainable disaster risk financing strategyin the U.S. Any effective solution, Kousky suggests, likely willinvolve government agencies at multiple levels, as well as privateinsurers. It also needs to address the vulnerabilities of all theparties by distributing risk and incenting participation byinsurers as well as residential and commercial property owners,adds Anthony Cappelletti, FSA, FCIA, FCAS, staff fellow, generalinsurance, for the Society of Actuaries.

What's clear is the current NFIP-reliant system is inadequate.Given the escalating flood risk due to climate change, floodinsurance in particular “can't be offered [privately] at a pricepeople are willing to pay,” says Kousky. By default, the financingburden thus has fallen on NFIP, a federal program that, due toheavily discounted rates that don't reflect risk, is woefully indebt and challenged to pay off claims, especially in high-lossyears like 2017.

Some type of public-private collaboration might provide the mostviable pathway to a sustainable disaster risk financing solution,according to Kousky and Cappelletti. But as Cappelletti notes,“Finding the right [risk-sharing] balance between government andprivate industry isn't simple.”

Experts report that only about 20% of residential propertyowners had flood insurance coverage in Houston, seen here, whenHarvey hit in late August. (Photo: AP Images)

Existing public-private programs instituted in the U.S. andelsewhere to finance disaster risk might already be illuminatingthe pathway to a solution. One is the U.S. Terrorism Risk InsuranceAct (TRIA) program. Instituted in 2002, TRIA established apublic-private partnership between the federal government, privateinsurers and commercial enterprises. For their part, insurers mustoffer terrorism insurance to commercial policyholders. For assumingthat risk, Uncle Sam provides insurers with a free up-front $100billion backstop in the event of a terrorist attack on U.S. soil.As a result, commercial entities gain affordable coverage (at acost of 2 to 6 percent of property premiums) for a risk thatotherwise was largely considered uninsurable. Still, the programremains untested for large-scale losses.

Other success stories can be found outside the U.S., withprograms such as the World Bank's Disaster Risk Financing andInsurance Program, which provides a financial safety net tosovereign disaster risk financing programs in various countries.Those programs use a layered approach to distributing risk,employing a combination of retention instruments (emergencyreserves, contingency budgets, etc.), budget reallocationmechanisms, contingent credit lines and risk transfer mechanismsinvolving reinsurance and capital markets for the highest risklayers.

What elements might a disaster risk financing scheme in the U.S.include?

Kousky and Cappelletti offer six possibilities:

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         1. On the supply side, make insuring flood riskmore palatable to private insurance companies, which as thingsstand today are “just not going to take on that risk,” Kouskyobserves. A program in which federally backstopped reinsurancekicks in at a certain loss threshold could help build a businesscase for private insurers to involve themselves in financingdisaster risk, suggests Cappelletti. “That kind of system canwork.”
         2. On the demand side, emphasize educatingconsumers about risk and the need for flood insurance coverage, andcombine that with requirements compelling consumers to purchasecoverage. Such a requirement could be coupled with subsidies tohelp low-income families afford coverage, suggests Kousky.Compulsory coverage would bolster sagging take-up rates indisaster-prone areas, she notes. According to reports, the totalnumber of federal flood insurance policies nationally has declined10% over the last five years.
         3. At the federal level, perhaps in the contextof the debate over NFIP reauthorization, phasing out the discountrates that contribute to NFIP's debt problem in favor of risk-basedrates.
         4. Invest more in proactive loss-reduction andrisk-mitigation measures, including low-interest loan programs andincentives for homeowners, as well as programs to require or incentlocal and state agencies in hurricane- and flood-prone areas tostrengthen oversight of new development, and to create a strongerlinkage between disaster risk and the siting of newinfrastructure.
         5. Establish a federal aid program to providefinancial assistance to disaster victims.
         6. Equip general insurance actuaries with theskills and tools to help insurers price and manage disaster risk.As one of the world's foremost actuarial education organizations,the Society of Actuaries is augmenting its General Insurance Trackto better prepare actuaries for the challenges that disaster riskpresents, emphasizing hands-on predictive modeling analytics andtraining and other advanced tools of the trade. Cappellettisays “actuarial education involves basic education, continuingeducation and work experience. All three pieces are necessary toprepare actuaries for dealing with disaster risk. The SOA is addingmore predictive modeling analytics coverage to its generalinsurance basic education and continuing education offerings. TheSOA's education system requirements include actual problem solvingusing predictive analytics tools that goes beyond what can beincluded in typical exams.”

In the wake of the havoc-filled 2017 hurricane season, theimperative to find a coherent, sustainable approach to financingdisaster risk in the U.S. has never been clearer. But doing sowon't be easy, concedes Kousky. “All the stakeholders will need tobe involved, and the federal government has to take the lead inrisk-mitigation and in providing a backstop.” The NFIPreauthorization process in Washington, D.C., likely will revealmuch about Uncle Sam's inclination to do so.