by Judith Curry
The issue of whether or not global climate change is causing more frequent or intense natural disasters is a red herring that is interfering with developing sane policies for reducing our vulnerability to natural disasters.
Perspective in the Quadrant
Last April, Wilson Tuckey wrote an excellent article in the Quadrant. Wilson Tuckey represented the West Australian seat of O’Connor for the Liberal Party in the House of Representatives from 1980 to 2010. Some excerpts:
The Australian continent is not Camelot. Extreme variations in climatic events are part of its very existence. They are not a product of recent times. They have been recorded since European occupation and in indigenous folklore. Events like cyclones and flooding usually give enough notice of their arrival to allow communities and government leaders to take preventive action to reduce the consequent damage.
Yet those governments and communities continue to ignore the lessons of history. In fact, they frequently defy them, as we have seen in Victoria and Queensland and Western Australia in recent months. This article attempts to show why, with the exception of the Lockyer Valley flood, every recent Australian “disaster” was predictable and preventable at well below the financial cost of the subsequent restructuring.
Climatic events only become disastrous when they damage the infrastructure humans have created. During my early years in Carnarvon most cyclones simply crossed the north-west coast at sparsely inhabited areas, maybe blowing over a few windmills or some sheds, and were often barely mentioned in the media. Today, such areas support major industrial activity, and population growth has concentrated in cities where a view of or proximity to the river or ocean is almost an imperative.
The winds blow no stronger, the bushfires are as frequent and the rivers flow no higher. The problem is that they now arrive where people live or work or retire. The associated industries demand that infrastructure be constructed in climatically hazardous areas.
So what is the response of the political classes? In nearly every occasion it is to wait for the disaster, then appear on television with the occasional tear, then call upon the generosity of the wider community who often have their own financial difficulties and then, of course, impose some new taxes—and finally demonise anyone insensitive enough to say it shouldn’t have happened in the first place.
No amount of tears or posing in the rain with television interviewers can excuse Queensland’s many years of dereliction of public policy, which was all potentially correctable during the period that the incumbent Premier has served in parliament. That her government chose to save money by not taking international insurance over its infrastructure is the height of arrogance. The quote of the state Treasurer that it was not value for money is political-speak for, “Why bother, if we can bludge on the generosity of the Australian people and the underwriting of the Australian taxpayer?”
n 2002-03, as Minister for Regional Services in the Howard government, I became alarmed at the open-ended nature of the federal and state governments’ Natural Disaster Relief Arrangements (NDRA). It is a process that encourages the states to ignore their responsibility to mitigate natural disaster outcomes or, in some cases, not to spend their own money on international insurance cover simply because it is cheaper to have the disaster and let the federal taxpayer pay for 75 per cent of the reconstruction including new for old. It is time the NDRA is managed upon a risk-related basis and that a form of “no claim bonus” applies. Risk rating would either reduce assistance to state governments who failed to implement disaster mitigation in forests or from cyclones and floods, or provide incentives for those who did.
Ninety per cent of the damage to property, loss of life and public infrastructure in recent years would not have occurred if reasonable expenditure in known preventive technology had been implemented. In my view, the cost would be less than the necessary reconstruction and far less than the associated loss of economic production.
Forest wildfires are often the result of politicians seeking preferences from radical minor parties. Yet they defy 60,000 years of history and kill hundreds of people not because of where they chose to live—such as in towns that had survived the traditional bushfires under the private management of the forest products industry—but because politicians put their election to high office ahead of a safe environment. We have media frenzy after every forest wildfire, searching for arsonists or a spark from some electricity transmission system. Yet even deliberate acts of lighting a fire would have no disastrous effects on life or property if there was no deliberately accumulated fuel load to feed and sustain a fire.
We are harangued about rising ocean levels (in centimetres) and more serious storm surges, yet half of the nation of Holland would be under the ocean were it not for the preventive intervention of a wise government. If people seeking an ocean-front lifestyle are prepared to pay millions of dollars for the block of land, plus a further million or two for the boat, why is it not a financial responsibility of the developer to provide the necessary safe environment that protects the development and those luxury cruisers from the predictable and recurring climatic events for which the region is notorious? They don’t bother, of course, because the public, either through their taxes or increased insurance premiums, will foot the bill. Why demonise insurers for declining to accept a bet on a certainty, which is tantamount to insisting a bookmaker accept bets on a one-horse race?
Why does the nation now have a body of uniformed suppression bureaucrats totally committed to extinguishing fires, putting tarpaulins over unroofed houses, ordering people from their homes which they know are at risk, because of their failure to implement even short-term preventive measures to make those people safe in their homes from impending climatic events?
From my experience, quite simple measures during construction will make a house cyclone-resistant, whatever the intensity of the wind. There are also short-term initiatives that can be implemented before an impending cyclone arrives that will save a vulnerable house or premises. Moreover, building standards for cyclone protection need not be
However, the appropriate effort and expenditure in prevention is not nearly as satisfying for the media or premiers seeking to resurrect their political careers. Imagine the dissatisfaction for our news media if a cyclone passes with no loss of life or property, or a flood is contained by adequate levee banks and stormwater drainage, or the trains and trucks keep rolling on properly elevated roadways, or an arsonist’s attempts to start a bushfire fail for lack of fuel in the forest. There are some people who have a vested interest in natural disasters, so there is a battle of ideas on this front that still needs to be won.
U.S. Public Policy Options for Changing the Federal Role in Natural Catastrophe Insurance
The U.S. Government Accountability Office issued a report in 2007 with the above title. The objectives of the study were
In recent years, much attention has been focused on the roles that the private sector and federal government play in providing insurance and financial aid before and after catastrophic events. In this context, GAO examined (1) the rationale for and resources of federal and state programs that provide natural catastrophe insurance; (2) the extent to which Americans living in catastrophe- prone areas of the United States are uninsured and underinsured, and the types and amounts of federal payments to such individuals since the 2005 hurricanes; and (3) public policy options for revising the federal role in natural catastrophe insurance markets. To address these questions, GAO analyzed state and federal programs, examined studies of uninsured and underinsured homeowners and federal payments to them, identified and analyzed policy options, and interviewed officials from private and public sectors in both high- and low-risk areas of the United States. GAO also developed a four-goal framework to help analyze the available options.
As Congress reevaluates the role of the federal government in insuring for natural catastrophes, Congress is faced with balancing the often-competing goals of ensuring that citizens are protected and limiting taxpayer exposure. This report examines seven public policy options for changing the federal government’s role, including establishing an all-perils homeowner insurance policy, providing reinsurance for state catastrophe funds, and creating a mechanism to provide federal loans for state catastrophe funds. Each option has advantages and disadvantages, especially when weighed against competing public policy goals. For example, establishing an all-perils homeowner policy is a private sector approach that could help create broad participation. But low-income residents living in parts of the United States with high catastrophe risk could require subsidies, resulting in costs to the government. Similarly, federal reinsurance for state programs could lead to broader coverage, but could displace private reinsurance. GAO also identified several policy options for tax-based incentives for insurance companies, homeowners, investors, and state governments. But these options, which could help recipients better address catastrophe risk, could also result in ongoing costs to taxpayers. While some options would address the public policy goals of charging risk-based rates, encourage broad participation, or promote greater private sector participation, these policy goals need to be balanced with the desire to make rates affordable.
Such events place enormous stress on insurance markets and governments, carry huge costs, and have raised concerns about who ultimately bears the costs and receives the benefits of government disaster insurance programs. For these reasons, debate has arisen about the appropriate role for the federal government in insuring against and in recovering from natural catastrophes. While many public policy observers agree that the federal government does and should play an integral role in disaster relief and infrastructure recovery, some other public policy observers have asked whether the government’s current role is the most appropriate and have suggested alternatives. Some have argued for more federal involvement, but others believe that the federal government may be doing too much, crowding out private insurance and reducing the private market’s ability and willingness to provide insurance-based solutions.4 Public policy observers have raised moral hazard concerns, noting that generous federal disaster relief may discourage homeowners from purchasing natural catastrophe insurance.5 These observers have also pointed out that government catastrophe insurance programs are vulnerable to adverse selection, in that homeowners who are at the most risk are also the most likely to buy catastrophe insurance.
We identified various options for altering the role of the federal government in catastrophe insurance by looking at bills before the current and previous Congresses as well as other options that were not included in current legislative proposals—for example, a proposal before a committee of NAIC. After fieldwork for this report concluded, we were informed that additional public policy options not considered in this report were being discussed before a committee of NAIC. We sought out both supporters and critics of each option, and our discussion of the third objective presents mainly advantages and disadvantages that they have identified. We developed a four-goal framework that was based on challenges faced by current government natural catastrophe insurance programs and used the framework to analyze current options for changing the federal role in natural catastrophe insurance. We developed these goals by drawing insights from the following: past GAO work, legislative histories of laws that changed the roles of state governments and the federal government after disasters, bills before the current and previous Congresses, interviews with public and private sector officials, and refereed articles written by academics in insurance economics. Although we identified numerous possible goals that could assist our analysis, we believe the four goals that we chose accurately capture the essential concerns of the federal government. The congressional policy choices ahead involve striking an appropriate balance among these goals.
The federal government and some states have developed natural catastrophe insurance programs that supplement or substitute for private natural catastrophe insurance. For example, the Federal Crop Insurance Corporation (FCIC) currently insures crops for losses from multiple perils, and NFIP insures against flood losses. Although these programs were created to provide affordable insurance coverage, by design they are not adequately funded—that is, the premium rates do not cover the government’s exposure—and rely on postfunding mechanisms to cover catastrophic loss years. Unlike private insurers that base premium rates on the risk of loss associated with properties, these programs offer legislatively mandated premium subsidies to encourage participation, and Congress appropriates funds for emergency disaster relief as needed. Similarly, some state governments have intervened when private sector insurance became prohibitively expensive or was not widely available, offering state-sponsored catastrophe insurance programs. For example, California created an earthquake fund in 1996 when private insurers significantly reduced the writing of homeowner earthquake coverage following the Northridge Earthquake. Likewise, Florida has created the Citizens Property Insurance Corporation (Florida Citizens)—the largest home insurer in Florida—to provide state-backed insurance coverage, including for wind damage, for homeowners who cannot get coverage in the private sector. The natural catastrophe insurance programs in Florida, Louisiana, Texas, and other states are funded through a combination of premium payments and postevent assessments and bonds. Like the federal programs, some state natural catastrophe insurance programs have been criticized for not charging premiums sufficient to cover risks. After the 2005 hurricanes, for example, some of these programs faced large accumulated deficits and required substantial public funding to continue operations.
As Congress and the industry continue to reevaluate the role of the federal government in insuring for natural catastrophes, Congress is faced with balancing the often-competing goals of limiting taxpayer exposure and ensuring that citizens are protected. We identified seven public policy options for changing the role of the federal government in natural catastrophe insurance, including a mandatory all-perils homeowners insurance policy, federal reinsurance for state catastrophe funds, a federal lending facility for state catastrophe funds, and several tax-based incentives to encourage greater participation by insurers and homeowners in managing natural catastrophe risks. As shown in figure 4, each of these options has advantages and disadvantages. As part of our evaluation, we weighed each of the options against four public policy goals that we identified for federal involvement in natural catastrophe insurance programs: (1) to have premium rates fully reflect actual risks, (2) to encourage private markets to provide natural catastrophe insurance, (3) to encourage broad participation in natural catastrophe insurance programs, and (4) to limit costs to taxpayers before and after a disaster. We found that a mandatory all-perils policy, for example, could help create broad participation and provide a private sector solution. But this option could also require subsidies for low-income residents and thus potentially create substantial costs for the federal government. Similarly, while federal reinsurance for state catastrophe funds could lead to greater participation by private insurers, it could also displace the private reinsurance market. Also, a federal lending facility could also help state catastrophe insurance funds with financing needs after a catastrophe but could also expose the federal government—and taxpayers—to the risk that a loan might not be repaid. Given the often-competing purposes of many public policy options, some options may be more appealing than others, but all warrant discussion as part of the current debate. While some options would address the goals of charging rates that reflect the true risk of catastrophic loss, encourage broad participation, or promote greater private sector participation, these goals must be balanced with the desire to make rates affordable.
JC summary: there are many commonsense actions that can be undertaken a the household and community levels to reduce the adverse impacts of natural disasters. Some of these actions are in expensive, while others are quite costly (although much less expensive than recovery from the cumulative disasters). The challenges facing national governments are not simple. The strategy undertaken by the U.S. GAO is exemplary in terms of understanding the scope of the problem, describing the values and overall policy objectives, laying out a broad range of policy options, and assessing the pros and cons of each. These are issues that need to be confronted. Even if Kevin Trenberth turns out to be correct in terms of his views regarding the role of AGW in worsening extreme weather events, even extreme mitigation measures would have no impact until the latter half of the century. Spending our efforts on discussing the links between AGW an extreme weather events is academic at best and misleading at worst.