Last winter the land in my forest contained snow that was frozen one day and when the next day was 20 degrees C, some 200 acres of snow melted in a day washing out the rural road adjacent to my property. The township claimed that a beaver dam on my land had broken, when my neighbors say something else was amiss: a winter’s worth of snow melted in a day and the culvert couldn’t handle the volume of in a day.
It’s not just my personal concern: whether it is flooding into your home or flooding caused on your land insurance claims are going up thanks to climate change. Whether termed “climate change” or “extreme weather,” an increasingly unstable environment is damaging homes and other property at an accelerating pace faster than observed in decades.
“The magnitude of these risks grows for homeowners, insurers, lenders and investors across the country while solutions to the impending insurance crisis are lacking,” says Clifford Rossi, a risk management expert who has served in executive roles at the U.S. Treasury, Fannie Mae, Freddie Mac, Citigroup and Washington Mutual.
“Just look at your own homeowner’s insurance renewal bill this year, on average the increase was 33% in DC, and with no viable solutions coming from the industry or government, homeowners are at the mercy of insurers—hoping their next letter from their insurer is neither a nonrenewal or an exorbitant premium increase,” adds Rossi, currently a professor of the practice and executive director of the Smith Enterprise Risk Consortium at the University of Maryland’s Robert H. Smith School of Business.
“Piecemeal approaches are unlikely to provide a long-lasting solution,” he says. “And meanwhile, the rise in the frequency and severity of natural disasters has underscored a form of market failure that suggests a fully private solution will be unable to provide long-term premium stability and availability of homeowners insurance.”
Writing for Mortgage Banker Magazine, Rossi proposes a “nationwide solution” to “essentially a nationwide problem.”
He writes: That solution is the Federal Natural Hazard Insurance Corporation – a private-public approach to providing homeowners insurance across all natural hazards and states that would address myriad failures in today’s insurance market.
As a new, federally chartered government-sponsored enterprise (GSE), the Federal Natural Hazard Insurance Corporation (FNHIC) would carve out natural hazards from existing homeowners’ policies, offering a separate policy based on a property’s exposure to the specific natural hazards in that location.
The Federal Emergency Management Agency’s (FEMA) National Flood Insurance Program (NFIP) would be absorbed into this new GSE and form the basis for a broader set of insurable hazards to be incorporated into these policies.
Private carriers would continue to offer and underwrite a standard homeowners insurance policy for risks unrelated to natural hazards while the FNHIC’s policies would be distributed by a network of insurers as the NFIP’s program is today. To reduce the FNHIC’s loss exposure and allow insurers and reinsurers to participate in this market, Climate Risk Transfer Securities (CLRTs) would be sold to private investors at tiers commensurate with their risk appetites.
Necessarily, such a major overhaul of how homeowners insurance is priced and provided in the U.S. would have significant implications for all market participants and the process of passing a chartering bill that implements such a program would be financially, politically, and operationally challenging, to say the least.
However, examining the merits of this structure – and the challenges such a program would confront—requires an understanding of the issues driving the breakdown in the delivery of homeowners insurance today.
