We’ve all seen the numbers. Growing dislocation between what consumers pay and what insurance companies incur. Difficulties in accessing affordable insurance solutions. Consumers in Florida and Louisiana pay several times more for their insurance. Replacement materials suffering from galloping inflation. But make no mistake; These statements relate to automobile insurance and not home insurance.
So why isn’t there a national auto insurance crisis? Partly because about 50 years ago, the auto insurance industry established a risk management framework that started with data and ended with safety standards. In between were certain government mandates, narrowly targeted government risk pools, and enough consumer demand that even Saturday afternoon truck commercials were full of references to 4-star insurance safety ratings.
If we hope to avoid a housing crisis in America, we must do so again in the face of growing risks posed by wildfires, hurricanes, extreme heat and flooding.
The first step – again – would be to establish a source of credible, publicly verifiable data that would deepen our collective knowledge of risks. In other words, we need a crash test dummy for homes, communities, and watersheds to inform and improve local decision-making. Once we have this information at the community level, we can strengthen the case for greatly expanding the effective but small-scale deployment of home safety standards, such as the fortified or prepared home designations from the Institute for Business and Home Safety (IBHS).
Government, particularly at the state level – where insurance is regulated – should use the same data to direct various forms of capital toward the right resilient infrastructure. They should embrace innovation in all its forms. And they should only put taxpayer dollars at risk to address real market failures, not to address cheap forms of capital.
But the biggest change we need is cultural. We must create a demand among consumers for safety that is at least as effective as that of cars.
Knowledge of climate
Changing culture starts with greater awareness. For example, there is a significant knowledge gap when it comes to flood insurance: 96% of U.S. homeowners do not have flood coverage, either because it is excluded from standard homeowners insurance policies or because the binary nature of flood zones gives at-risk homeowners a false sense of security. As a result, too many consumers realize that flood damage is not covered until after the event.
Take the recent flooding in Texas as an example. FEMA estimates that only 4 percent of homeowners nationwide have flood insurance, even those located in high-risk areas. In Kerr County, the area hardest hit by flooding, the percentage of homeowners with flood insurance was even lower. Only 2.2% had policies in place. Many in Texas thought flood insurance was an unnecessary expense or only discovered their lack of coverage after the floodwaters receded.
The notion of a “once-in-a-hundred-year storm” is a fallacy. Too many families mistakenly believe that surviving one natural disaster means the chances of facing another are low. The reality is much more complex. Regardless of recent disasters, each event must be seen as a critical opportunity to build back stronger and smarter.
Once we all understand the true threat posed by today’s extreme weather events, we can come up with a more effective collective plan of action.
Risk mitigation
In many cases, the best offense is defense. The Natural Hazard Mitigation Report shows that it is six times more cost-effective to mitigate a risk than to recover from an incident.
Facilitating large-scale rebuilding to IBHS standards will better equip homeowners and communities to withstand natural disasters such as wildfires and hurricanes, thereby improving their economic stability. Our first line of defense will always be proven structural strengthening techniques that have relatively low cost but high return, such as creating defensible space around homes, improving roofing, installing impact-resistant windows, adding backup generators, and deploying low-temperature sensors.
And as with automotive, there is also a wave of modern technologies that need to be evaluated, scaled and deployed – in both consumer and industrial markets – in a similar three-to-five-year market segment cycle that has highlighted the adoption of rear-view cameras and blind-spot monitors as standard equipment.
Public-private partnership
Insurability means affordability – affordability providing peace of mind and financial stability to the individuals and families who make up our communities as a whole. For communities that fail to adapt, the economic consequences will be widespread and profound.
Ultimately, we need to replicate the value chain approach that made the automotive safety framework successful. Manufacturers, like OEMs of the past, must consider safety as a fundamental customer requirement. Architects, structural engineers and developers, like automotive parts suppliers around the world, must make resilient design the norm, not bespoke. And real estate agents, just like car dealerships offering the latest security features, must understand how to navigate different analytics tools and disclosure approaches in a quest for greater transparency around risk and pricing.
We have seen this type of public-private partnership work in the area of energy efficiency. Companies work with communities to audit homes, and communities encourage homeowners to implement these tips with discounts. The same could work for resilience. Imagine resiliency audits that, when implemented, not only reduce home insurance rates, but make the entire neighborhood safer and more insurable.
But more importantly, we need to replicate the safety-focused mindset that automakers and insurers created in the 1970s. After all, if we can get truck owners to demand a 4-star safety rating, we can do it again to homeowners.
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