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Monday, October 18, 2021
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COLUMN: The Moral Hazard of Underinsurance

Over the past four years, more federal recovery dollars have been provided to disaster-impacted communities than were provided in the previous decade combined. Most taxpayers would be concerned to learn that one of the major drivers of federal disaster spending is uninsured losses. Repeatedly, one of the FEMA Public Assistance (PA) Program’s largest recovery line items is the repair and reconstruction of uninsured public buildings and contents (Category E). Setting recent historic disasters aside, when examining FEMA PA obligations from 1998 to 2016, Category E projects have the highest obligation total, $19.2 billion equating to more than 25 percent of total obligations over that span of time.

Typically, FEMA PA funding comes with a maximum 25 percent non-federal cost-share, which is often less than the cost of an insurance premium would be to insure a community’s public buildings and contents. As a result of this direct disincentive, many communities are either underinsured or do not carry insurance for their public buildings at all. In fact, this is a long-standing concern, as a 1982 Government Accountability Office report found that FEMA reimbursing state and local governments for the “repair and reconstruction of uninsured public buildings is inconsistent with the intent of supplemental assistance.” To affect change, greater consideration needs to be given to both reinsurance as well as community pre-disaster mitigation strategies.

While the Disaster Relief Act (1974) and the Stafford Act (1988) were innovative in establishing and promoting the PA Program, they did not establish strong incentives to reward communities for doing the right thing. For example, why would state and local governments work, and pay, to implement insurance and reinsurance strategies to reduce disaster costs to the taxpayer if they know that FEMA will pick up much of the tab for their uninsured losses? In the face of a changing climate, the time is now to rethink disaster laws and policies and provide incentives to communities that implement smart land-use planning and insurance strategies coupled with building and residential codes designed to protect infrastructure against the known hazards in a community.

Currently, the federal government is routinely “rewarding” uninsured states and communities by reducing their 25 percent cost share to 10 or even 0 percent when their losses reach massive thresholds. If we truly want to adapt to increasing disaster activity, this is backwards. Designed to be supplemental in nature, FEMA disaster assistance should be focused upon providing grants to fix public infrastructure that the private industry cannot or will not insure. To make this change, current disincentives need to be turned into rewards. For instance, the disaster cost-share percentages borne by FEMA (typically 75 percent) could be incrementally increased for communities that implement sound insurance and mitigation plans. Additionally, communities that adopt these best practices could also have greater access or priority to “blue-sky day” preparedness and pre-disaster mitigation and resilience grants across the federal government spectrum.

Reinsurance strategies can work, and state and local governments should investigate emerging opportunities in the insurance and capital markets to reduce their disaster cost exposure. Continuing to ask Congress for supplemental funding to pay for disasters is an archaic method of dealing with the problem. While I was in office, FEMA worked directly with the reinsurance industry to reduce cost exposure to the National Flood Insurance Program (NFIP). Essentially, FEMA paid a $124 million premium before the beginning of the 2017 hurricane season that paid out $1 billion after Hurricane Harvey hit Texas and continued to provide benefit following hurricanes Irma and Maria as well. This strategy greatly improved FEMA’s ability to pay NFIP claims, and the funding was backed up by the private sector rather than the federal government via FEMA’s Disaster Relief Fund (DRF).

It is an unsustainable moral hazard to continue rewarding dangerous behaviors that continue to stretch our nation’s disaster response and recovery mechanisms to the brink – rebuilding disaster-devasted communities ultimately costs much more than implementing stronger codes and mitigation programs over time. While it is hard to predict when disasters will strike, it is possible to prepare and invest in resiliency to decrease future vulnerabilities, improve long-term recovery outcomes, and reduce overall disaster costs. Failure to act ensures that federal disaster costs will continue to rise, and poor behavior will continue despite the increasing frequency and magnitude of natural disasters.

Brock Long
Brock Long is the former Administrator of the Federal Emergency Management Agency (FEMA). Confirmed in June 2017 by the U.S. Senate with strong bipartisan support (95-4), Brock served as the nation’s principal advisor to the president responsible for coordinating the entire array of federal government resources down through 50 states, 573 tribal governments, and 16 island territories to assist them with executing disaster preparedness, mitigation, response, and recovery. Brock is the 10th Administrator and the youngest to hold the office. While serving as Administrator, Brock coordinated the federal government’s response to over 144 presidentially declared disasters and 112 wildfires, including three of the nation’s most devastating hurricanes and five of the worst wildfires ever experienced. During this time, nearly $44 billion of disaster activity occurred under the various federal recovery programs. As the FEMA Administrator, Brock led major initiatives that will have long-lasting impacts on the emergency management community. He rapidly transformed the agency’s business enterprise by implementing innovative Community Lifeline and FEMA Integration Team concepts to strengthen public-private partnerships and permanently embed full-time staff within the offices of state and tribal governments to better meet constituent needs. Further, as the result of his effective advocacy and eight influential congressional testimonies, the Disaster Recovery Reform Act (DRRA) became law in October 2018, making pre-disaster mitigation a national priority with the Building Resilient Infrastructure and Communities (BRIC) grant program. The DRRA also provided meaningful changes to the FEMA workforce and bolstered state and local emergency management capabilities. From 2008-2011, Brock served as Director of Alabama’s Emergency Management Agency (AEMA) under Governor Bob Riley. As Director, he served as the State Coordinating Officer for 14 disasters, including eight presidentially declared events. Brock also served as an on-scene State Incident Commander for the Alabama Unified Command during the Deepwater Horizon oil spill.

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