Broken dams, closed interstates, hundreds of people stranded, and historical flooding disrupted the East Coast this weekend from the wrath of Hurricane Joaquin. On Sunday, both Carolinas, Virginia, and parts of New Jersey were declared under states of emergency, and flash flood watches were in effect for Georgia and Delaware through Monday night. In particular, South Carolina is faced with historical catastrophic flooding that Governor Nikki Haley calls, “the 1,000-year level of rain.” Although, the East Coast avoided a direct hit from Hurricane Joaquin, there is no doubt that this will be a substantial recovery process for these communities.
While this storm doesn’t compare to Super Storm Sandy or Hurricane Katrina, each of us – homeowners, businesses, municipalities, local and state government agencies – should be aware of the financial impact of flooding on our communities. Insurance companies keep raising the rates and deductibles, but covering less for policies involving damages from natural disasters resulting in tremendous gaps our coverage. During a catastrophic event, communities as well as local and state agencies are relying on the Federal Emergency Management Agency (FEMA) for disaster recovery. However, FEMA and our government do not have the capacity to handle the financial burden for disaster recovery, which leads to an expensive and lengthy recovery process for states, businesses, and homeowners. These once-in-a-hundred year catastrophic events are happening more regularly. So, what can be done to financially prepare for the next catastrophic event?
Catastrophe bonds (CATs) are a pre-emptive solution to help transfer and mitigate the financial risk of catastrophes. CATs are insurance-like instruments that can be used by states, municipalities, government agencies, and utilities to proactively prepare for future catastrophic events. Unlike traditional insurance, catastrophe financing modeling calculates risk based on the likelihood of disaster and the parametric trigger level. If a qualifying event occurs that meets the trigger conditions, then payment is activated. CATs are sold in the public markets and as private placements. Through Q3 of 2015, the catastrophe bond market has reached $25 billion and is expected to continue to grow through 2016.
There are significant financial benefits to the utilization of catastrophe financing as a risk transfer mechanism.
1. Speed up cash flow when a loss event occurs
2. Reduce spending on contingent liabilities
3. Reduce downside risk to finances when a lost event occurs
4. Proactively manage financial impacts from climate events
In conclusion, businesses, municipalities, local and state agencies should review their current insurance coverage and identify ways to proactively and financially prepare for the next climate disaster to reduce the impact of the recovery process for future catastrophic events. Catastrophe bonds provide additional financial support in addition to using traditional insurance, reinsurance, and relying on FEMA for post-disaster funding.
Intersect Advisers’ principals, Ian Michel and Marc Felgoise, have a depth of experience in the area of Catastrophe planning and recovery. They are recognized nationally for their consulting on capital market financing in the use of Green, Resilience and Catastrophe (CAT) bonds. Alan Rubin, managing director, helped design and underwrite the catastrophic fund for hurricane relief and rebuilding of the State of Florida. He served as Vice President of the Miami-Dade Economic Development Agency, where he led major reconstruction efforts after Hurricane Andrew. This earned him national exposure as an expert in the field of natural and manmade disasters, as well as the nickname of “Hurricane Czar” by local, state and federal officials.