According to FEMA damage estimates over 105,000 structures in the Houston-Galveston region experienced damage due to Hurricane Harvey natural disaster. The City of Houston government buildings alone realized approximately $175 million in damage. This is $100 million over their insurance limit. Both the private and public sector are actively working recovery efforts with a desire to rebuild as quickly as possible. Most have made their FEMA claims and those that have flood insurance, only about 15% of the population, have met with adjusters and are actively pursuing their claims.
As I talk with people both in the private and public sector, the underlying concern is how we are going to rebuild from this natural disaster. Based on my own conversations, many know they are not going to be made whole whether they have FEMA and/or insurance. Further, these conversations reveal that many do not want to build back to what was, they want to build to be more resilient. Unfortunately, the funding to do so appears not to be available. Many would like to stay in their neighborhood and build-up, however, $100,000 which are estimates they are hearing to raise their elevation, are not in the cards. Some may get buyouts, but that is a fraction of the structures that were affected and remain in harm’s way.
The city government and school districts are not in a much better position. They are largely looking to restore the existing building and get services back to normal. I have not seen anything about rebuilding more resilient public buildings, but maybe we are too soon in the process. Like those in the private sector, it is unlikely they will get any funding in the near-term, state or federal, that will allow this to happen.
Beyond the individual property recovery, there is also consideration for larger infrastructure recovery and resilience improvements to mitigage natural disasters. Items include the third reservoir in the northwest of the region, the Ike Dike, speed up the completion of the of Brays Bayou mitigation project, to name a few. Similar to individual properties, they also do not appear to have the adequate funds available. (Except for maybe Brays Bayou completion.)
I have written in previous posts about the funding options that are available for improving the resilience of communities. They can be found here and here. In both of these articles, I discuss a variety of funding mechanisms that can be used to improve community resilience including green bonds, resilience bonds, and public-private partnerships.
Solution: Resilience Bonds
I would like to focus a bit more on resilience bonds. Resilience bonds are bonds that allow issuers to build infrastructure to reduce loss or likelihood of loss during a natural disaster event; build new infrastructure with the expectation of reducing risk. These can be used for coastal protection, sea walls, stormwater mitigating green infrastructure, etc.
For a resilience bond, the issuer would utilize a catastrophe model to determine baseline risk to infrastructure from natural disasters. The issuer would then calculate how the implementation of a more resilient system would reduce future loss in comparison to this baseline. A resilience rebate is set based on the value of the anticipated reduced loss. The reduced risk of principal to the investor and the reduced premium expense to the sponsor is captured and provided to the sponsor as a rebate. This rebate can be used for financing resilient infrastructure or risk reduction investment.
I am not an insurance expert, but the way I understand it is that building more resilient reduces the risk of a project to a natural disaster. This decrease in risk reduces the premium of the catastrophe bond (cat bonds) which is already being issued to cover infrastructure in the event of a major triggering event. The rebate is coming from a lower cost of cat bonds. For example, cat bonds that cover flood damage or storm surge damage, when up for renewal, can be paired with a set of resilience-focused projects. These projects will lower risk to this infrastructure, thereby reducing premiums resulting in funds available to invest in more resilient infrastructure.
By taking steps to improve resilience utilizing resilience bonds, the public sector reduces risk to infrastructure, as well as realize economic, financial benefit from the proceeds of the resilience rebate. Resilient infrastructure funding by resilience bonds can reduce economic, social and environmental risk, as well as receive financial benefit of avoided losses. Cat bond costs also continue to go down in cost as more resilient infrastructure is added to the community. Further, more resilient infrastructure would also reduce costs of individual hazard insurance, wind, flood, etc. Not only does government see lower insurance costs, so would households and private companies.
What About Individual Property Owners?
What has been discussed here is largely focused on public sector facilities and infrastructure development. We still are lacking the mechanism for private properties, commercial and residential. This is becoming an even more urgent issue as we see the National Flood Insurance Program is under significant financial duress and is actively working on moving properties off of this insurance into the private market. One thing to consider as this $1 billion transition occurs, is for Texas to create to flood insurance program similar to the Texas Windstorm Insurance Association (TWIA).
In May of this year, the TWIA sponsored a $400 million cat bond and currently has $4.9 billion in aggregate funding. This amount is anticipated to cover the current hurricane season. What can make the TWIA more sustainable, would be to consider resilience bonds as it renews its cat bonds. This would include using cat models to assess wind risk to private properties. It could then assess what strategies can be done to reduce this risk to private properties. A good guide to follow would be the Fortified Standard. If properly structured, the TWIA would see a resilience bond rebate. These rebate dollars would then be set in a fund that can be provided to homeowners to reduce their wind risk to hurricanes and straight-line wind events. The outcome would be more resilient infrastructure, less costs for damage recovery and overall improved community resilience.
Resilience Bonds to Mitigate Flooding for Private Sector
Can a similar process be considered for the flood insurance market? There appears to be a healthy appetite for cat bonds by institutional investors. What would it take for the state to issue flood-related cat bonds? Can the state accurately assess flood risk for the private sector? There is ongoing concern about the accuracy of our flood models and floodplain maps, particularly along the Gulf Coast. If we can agree on the risks, can we identify the appropriate risk mitigation strategies for individual structures? I would not think that is an impossible task. We would then need to quantify the avoided loss with the implementation of these strategies. This would create the rebate. This resilience rebate could then be available for individual property owners to implement the mitigation measures. The result would be lower individual premiums, lower recovery costs and an overall improvement in community resilience from natural disasters.