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 May 15, 2001
The Blue Sky Foundation is pleased to provide “Winds of Change, Hurricane Mitigation”. We believe this story is so compelling that it may well change the way we build, insure, and maintain our homes and businesses. Please take 16 minutes to see if you agree.
The production outlines a series of steps we, as a society, can choose to take to reduce the risk of property loss from high wind events. It is a relatively new approach that relies on risk based engineering analysis that has only been technically feasible for the last few years. We at the Foundation believe now is the time to consider this concept in North Carolina for the following important reasons:
* Recent windstorms have exacted billions of dollars of damage in North Carolina. Those that analyze these events predict that we have yet to see the most destructive storm likely to visit our State. There is a 1% chance that a “big” storm will produce 100 mph peak winds as far inland as Raleigh, with sustained winds greater than the peak gusts in Fran. This is analogous to having Raleigh, and all of Eastern North Carolina, in the 100-year flood plain, only the hazard is wind.
* New wind storms and the inevitable big one, will come to a very different North Carolina than the last time a monster storm visited our shores. Development in our coastal plain continues unabated, putting billions of dollars worth of structures and contents at risk. In the next 10 years the counties that touch the coast will top $100 billion in potential loss by themselves, not counting those inland cities at risk.
* At the same time this growth is taking place at breakneck speed, the Insurance industry is reporting during the last 5 years they are paying out 2 dollars for every 1 dollar collected in premium on home properties and 6 dollars for every 1 dollar collected in premium in the clustered housing for windstorm coverage on the beach. This is a dangerous business model and creates an inevitable tug of war between price and availability in the insurance industry. This is a game that the consumer and industry can both end up losing.
* The State of North Carolina is presently in a budget crisis that in large part is the result of the impact of the recent hurricane disasters. Affected businesses stopped paying taxes and many never will again. The state has invested more than a billion dollars of taxpayer money in response and recovery, draining our coffers at a time of prosperity. What would happen if the big storm comes in a year like this while we face a budget shortfall and we are unable to help like we did with the recent flood?
We have a king-sized problem concerning our wind hazard. We also have a potentially elegant solution. Examples of risk-based, hazard-resistant engineering tied to market-based reward systems are beginning to appear in other states. Earthquake risk in California, hail risk in the Midwest, wind risk in Texas, New York, Hawaii and Florida all have substantial insurance and/or tax reward systems to support superior performing structures. Each effort has verified building performance as the key ingredient. This is good news to North Carolina because we don’t have to invent the system.
The National Flood Insurance Program (NFIP) has an elaborate risk-based reward system in place through the Community Rating System (CRS). More than 71,700 flood insurance policy holders in seventy-five (75) local governments in North Carolina are saving $2.1 million annually on their insurance premiums with community-based incentives recognized by CRS. Individual homeowners can obtain additional insurance premium reductions for elevating a home above the 1% flood risk. When the elevation savings are included, the cost of flood protection has been reduced even further. This reward system saves the program money, the homeowner premium costs and trauma, and the state and local government money for response services and lost tax revenue. Everyone benefits by being prepared for the flood, and the reward system is driving the right decisions.
A program that addresses wind with a market-based approach was recently implemented in Florida. The Florida Windstorm Underwriting Association (FWUA) provides the majority of coastal wind insurance in Florida, similar to the North Carolina Beach Plan. A homeowner that has his or her home verified through inspection to meet superior FWUA wind resistant criteria can save as much as 60% (sometimes more) in insurance premium costs compared to a similar baseline home. Government units that benefit from having less vulnerable housing are also able to provide a variety of rewards through alternative tax rates, lower impact fees and higher occupancy density requirements bonus tied to the same rating system. The compelling story in Florida is that the increased cost of fortification of the home can often be offset by the difference in reduced insurance premium and other rewards.
The FWUA was actuarially unsound before the rating program. This is not unusual for state-mandated insurance programs. The state legislature required the program to become actuarially sound. Insurance premium rates for unmitigated homes are being increased as a result of the evaluation process. The old way of doing business seriously affected the viability of the state insurance program and perhaps even the state bond rating should another Hurricane Andrew slam the state. The wind rating system implemented last summer by FWUA provided an alterative to higher rates necessary to make the fund actuarially sound. High-risk homes can now be economically retrofit to withstand the wind and the cost in many cases can be paid for through reduced wind insurance premiums. Everyone wins as the risk is reduced.
North Carolina is not Florida; we do not have the same exposure, type of buildings, or wind regime. North Carolina wind insurance premiums are not likely as actuarially unsound as they were in Florida, because private insurers are still in the market. North Carolina in all likelihood has a better legacy in building technology, codes and code enforcement as well. This is all good news, but is also based on some speculation.
What we need to know now are the facts. This will require an in-depth evaluation in North Carolina to see if a rating system makes sense. It is conceptually simple to understand that a home that is well built is a better insurance risk than one that is poorly built. Therefore, it follows that the homeowner of a protected home should not pay the same insurance rates as the homeowner of an unprotected home. It is even understandable that the government should not treat homes the same way due to their different impact during a wind event. What is not so apparent is how to keep the homes affordable and not disproportionately affect the disadvantaged in the process.
The key to putting in place a voluntary risk-based property rating system is to do a comprehensive assessment of our building stock and develop North Carolina specific parameters for the predictive models. Only then can we make actuarially sound decisions and let the economics and market forces make the key decisions within the rating system. One of the other outcomes of the analysis must be to seek ways to keep homes affordable now and over the life of the home, and to stay neutral in decision making.
To perform a statistically sound evaluation, do the economics, and get the appropriate industry and public input will take several years and will cost between $1.5 - $2.0 million. In the process approximately 1000 homes will need to be field evaluated and analyzed. With this statistically sound database of North Carolina homes, tied to similar databases like Florida’s, and engineering models, we will be able to accurately assess the risks and evaluate the economics of mitigation for both existing and new homes. Only then can we determine if we are balancing the risks with the costs and benefits of mitigation. We are speculating more than predicting now when we try to determine the economics. One should keep in mind that a possible outcome may be that our present codes, with a few exceptions, are adequate and the reason we need a rating system is primarily to retrofit our older, more vulnerable homes. This analysis could be cost-shared between industry, State, and Federal beneficiaries.
We, at the Blue Sky Foundation, believe market forces will make the difference and that the free market system will sort out the best products and services to reach the optimal technology for our environment. But it will only do that if a rating system is in place to allow the consumer to make the choice. We propose that the State legislature, the NC Division of Emergency Management, the Department of Insurance, the Insurance Rate Bureau, the Homebuilders Association, Insurance Industry, and other interested parties participate in a summit to evaluate this concept. We believe we can find a way to move forward and produce the data so we can make informed decisions that will economically protect North Carolina. The time to act is now.
Best Regards,
Don Markle
Executive Director
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