Paying Yearly for 100-year Flood

By Maria Belenky, Hayden Brown, Gregory Gangelhoff and Tracy Liao

During the first three days of December 2007, the Pacific Northwest was hit by a series of three large storms.

Snow and hurricane-force winds battered the coasts of Oregon and Washington, while heavy rainfall—reaching 100-year levels in parts of the region—caused widespread flooding and landslides. The storm also submerged a portion of Interstate 5 under 10 feet of water. The event didn’t garner national headlines like Hurricane Katrina or Superstorm Sandy, but it is nevertheless quite significant—not because of its rarity, but because of its commonality.

The storms that rolled across the Pacific Northwest that December resulted in 11 deaths, caused an estimated $1 billion in damage and earned a Presidential Disaster Declaration. In many ways, however, these storms are not unique. Eleven Presidential Disaster Declarations have been granted to Oregon and thirteen to Washington since 2000, averaging approximately one per year. The total number across the entire United States during that same time period: 886. Devastating natural disasters are not the rare events that make it to the front page of The New York Times anymore; they are happening frequently and inflicting millions of dollars in damage annually upon households and local economies throughout the country.

We are often taught to be prepared for the unexpected—to bring a raincoat when it’s sunny, to spring for a warranty with a new gadget in our hands, to pack an extra sandwich, just in case—but are we truly prepared for the cost of natural disasters? The short answer is no.

While some homes, businesses, and public structures are covered by private insurance, the federal government is typically the principal funder of post-disaster recovery. Since the U.S. Congress signed into law the Robert T. Stafford Disaster Relief and Emergency Assistance Act (“Stafford Act”) in 1988, U.S. states have been able to rely on federal funding to cover some of the cost of relief and reconstruction. For example, FEMA’s Disaster Relief Fund (DRF) provides millions of dollars in grants annually to households and local and state governments following major natural events—those that earn a Disaster Declaration from the President. For flooding, grantbased assistance is supplemented by payments from the National Flood Insurance Program (NFIP), a federally subsidized insurance scheme sold through private insurers. A handful of other initiatives also offer postdisaster assistance, among them the Federal Highway Administration’s Emergency Relief Program, which provides funding to repair federal roads and highways, and the Federal Crop Insurance Program, which protects farmers against disaster-related crop losses.

Despite heavy dependence on their funds, many of these programs are in trouble. FEMA’s DRF, which relies on congressional appropriations, has been chronically under-funded. Between 2005 and 2011, the average base appropriation for the Fund was roughly $1.75 billion. The annual spend-out rate: approximately $4.6 billion annually. Without supplements, the DRF would have faced an average yearly funding deficit of nearly $3 billion for the majority of the last decade.

The NFIP is also struggling. Until 2004, the program was largely solvent—it was able to pay filed claims with the revenue it earned in premiums. The 2005 Hurricanes Katrina and Wilma changed this dynamic. To cover the surge of claims resulting from widespread flood-related damage, NFIP had to borrow $16.8 billion from the U.S.

Treasury; the department authorized an additional $9.7 billion in borrowing authority after Superstorm Sandy. The program is currently at least $20 billion in debt.

It is clear that federal funding is woefully insufficient to cover the costs of natural disasters. What’s more, if public funds are inadequate today, they will likely become even less so tomorrow as the cost of natural disasters rises, both due to an increasing concentration of wealth in disaster-prone areas as well as the more pronounced effects of climate change.

We know the problem, now what can be done about it? First, it is important to recognize the benefits of resilience—improving the ability of homes, businesses, and key infrastructure to weather catastrophic events through risk assessment, adaptation, and mitigation. For instance, regional bodies should identify and implement shovel-ready green and grey infrastructure projects that improve communities’ resilience to natural disasters. This kind of preventative action saves lives and reduces the cost of immediate and long-term recovery, thereby shrinking the amount of resources needed for relief and reconstruction. But damage cannot be entirely eliminated.

To effectively address the remaining costs of natural disasters, state and regional actors should think creatively about developing innovative financing instruments that will allow them to obtain quick and reliable postdisaster funding. These include multi-state risk pools, catastrophe bonds, and other instruments that can lower reliance on federal funding and transfer risk to the capital markets.

Several examples of innovative financing mechanisms already exist around the world. In 2006, Mexico’s Natural Disaster Fund issued the first sovereign parametric catastrophe bond. Known as CatMex, the bond provided $160 million in protection against earthquake risk over three years. After CatMex matured in 2009, Mexico partnered with the World Bank to issue the world’s first multi-catastrophe bond, called MultiCat, in 2012. The bond provides parametric insurance coverage against hurricanes on the Atlantic and Pacific coasts and earthquake protection in three regions around Mexico City. Although both of these bonds were issued by a federal government entity, the catastrophe bond model does not have to be unique to federal governments. Regional, state, and even municipal entities can also employ a version of this model to increase access to immediate post-disaster funding.

Although natural disasters will remain unpredictable, the flow of post-disaster funding need not be. Now is the time for state and local governments to start the conversation around innovative financing mechanisms that can ensure disaster risk preparedness for decades to come.

This blog post draws on “Own Your Risk: Reframing Risk & Resiliency in the Columbia River Basin,” a joint publication by the International Energy and Environment Practicum Program at the Johns Hopkins School of Advanced International Studies and Swiss Re.