Paying for Damages—Sometimes Before They Happen

May 2, 2017

The first three months of the year are usually easy on insurance companies—and the rest of us—simply because it’s not hurricane season, when claims for property and vehicle damage are typically much higher. Not this year, though. US insurers are reporting that extreme and more frequent weather events have made 2017 the most expensive first quarter for them in more than 20 years. In the US alone we had 425 tornadoes in the first three months of 2017, versus 205 in 2016 and an average of 93 in the few years before that.

In practical terms, that means businesses, homeowners, and even drivers can expect their insurance rates to go up, continuing a trend. Since 2014, for example, insurance for the average homeowner has increased by 16%. Looking ahead, it means insurers—and the rest of us—are more likely to seek ways to make weather events less expensive. For insurers, that might mean providing incentives for those—cities, businesses, individuals—who take steps to protect their property, similar to the way car insurers might offer reduced rates to those who pass a safe-driving course. For the insured, it likely means looking at preventive measures, such as upgrading infrastructure, moving critical components to higher ground (as the New York subway system did with electrical equipment after Hurricane Sandy, for instance), or relocating some structures altogether.

The problem is that it’s often harder to find money to pay for preventive upgrades than to clean up the damage afterward. It’s an ongoing tradeoff in many arenas. During the last wildfire season, then-Secretary of Agriculture Tom Vilsack noted that money that could have been spent removing dead trees from the forests, thereby reducing the fire risk, was being spent instead on fighting existing blazes. The same general principle applies to preparation for storms.

One of our writers, Carol Brzozowski, recently brought to my attention the rise of resilience bonds—sometimes called catastrophe bonds—that governments are using more frequently to pay for risk-reducing measures like infrastructure upgrades or protective barriers that might not otherwise get funded, as well as to limit the financial impact when damage does occur. A few years ago Carol wrote about the state, at the time, of the National Flood Insurance Program; we’ll also be spending some time on resilience bonds and other measures in upcoming issues.

Is your city or county currently using these bonds to pay for infrastructure improvements?

About the Author

Janice Kaspersen

Janice Kaspersen is the former editor of Erosion Control and Stormwater magazines. 

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