The impact of Superstorm Sandy may be over for residents along the East Coast but it's just getting started for homeowners insurance companies, the global reinsurance industry that keeps those insurers afloat, and academics charged with shoring up our national disaster preparedness.
It could be argued that the geography of Sandy, particularly its path into lower Manhattan, has prompted a much broader examination of how we insure against catastrophes than did Hurricane Katrina in 2005. That's understandable. Katrina hit at the latitudes where insurers expect hurricanes to hit, far from the doorsteps of power or privilege. Sandy, by contrast, hit where such storms had been a once-in-a-lifetime event, and on the very doorstep of America's financial heart and national news media.
Sandy blew three questions into our collective consciousness: Is global warming real? Is this the new norm in light of last year's Hurricane Irene? And how do we insure after Sandy?
If hurricanes would just stay in hurricane country, everyone -- insurers, reinsurers, the feds and Wall Street -- would be much more comfortable carrying on business as usual. The problem with this recent northward migration (aside from endangering more people) is that far more infrastructure -- including roads, bridges, subways, hospitals, schools and utilities -- lies in the path of destruction.
Who pays to rebuild all of that? Under the Stafford Act, the feds (meaning, indirectly, us) pick up 75 percent of the tab while the states and municipalities (again, meaning us) pick up the remainder.
In a recent New York Times op-ed, Erwann Michel-Kerjan and Howard Kunreuther of the Wharton business school at the University of Pennsylvania point out that 20 of the world's 30 most expensive insurance catastrophes since 1970 have occurred since 2001, 13 of them in the United States.
The authors note that while several states in hurricane latitudes have established their own state-run wind insurance pools, this technique only succeeds in keeping homeowners insurance rates artificially low and is unlikely to withstand a catastrophic strike.
What can be done?
You may not like their recommendations:
1. Premiums should reflect risk: "This makes transparent the magnitude of the hazards one faces and could limit new construction in high-risk areas," they write.
2. Address equality and affordability: "Those who can't afford insurance will need help. We propose establishing a federal disaster insurance means-tested voucher program similar to the food stamp program."
3. Multiyear disaster insurance contracts: Rates would be locked in so that customers won't "capriciously abandon their contracts after a couple of years without a disaster."
As a longtime Florida resident, I can see all sorts of problems with implementing these suggestions, from the practical to the political. That said, neither do I relish the thought of my current state-sponsored homeowners insurance blowing away just when I need it.
How should we insure after Sandy? Any ideas?
Follow me on Twitter: @omnisaurus.
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