Climate Wire | Many of the nation’s disaster-related organizations have been exposed to perilous financial risks at the start of the hurricane season, jeopardizing efforts to recover from the catastrophe in much of the country.
As the financial crisis ripples through the states of the Gulf Coast, threatening to force people to pay premium premiums for years to come, communities across the country are seeking help from the Federal Emergency Management Agency for disaster recovery. You could lose your money.
There are several factors that are causing financial problems. Huge costs from storm damage since 2020, including Hurricane Ian in September, a volatile insurance industry, and unprecedented disaster spending by FEMA.
Taken together, this financial risk puts countries facing increased disaster damage from climate change and the development of at-risk areas, and a disaster finance system ill-prepared to pay the costs as the hurricane season begins on Thursday. It reflects.
Here is a breakdown of financial issues.
Federal Emergency Management Agency
FEMA estimates that disaster relief funds will be depleted by August, when the Atlantic and Gulf Coasts face the worst hurricane danger, and wildfires tend to be the most intense in the West.
This fund is a multi-billion dollar account that will help pay for state cleanup and rebuilding after a major disaster. FEMA is also providing funds from the fund to people in the affected areas to cover some emergency costs such as shelter, home repairs and supplies. Payouts are typically in the thousands of dollars.
According to FEMA’s latest monthly report, the fund will hit a deficit of $159 million in August and $6.3 billion in September unless Congress replenishes the account.
FEMA Administrator Dean Criswell first publicly addressed the shortfall during a congressional hearing on April 18, when she told the House Appropriations Subcommittee that the administration would ask Congress for $12 billion in emergency funding.
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“We are still working with the administration on what the additional requests will look like,” Criswell said at a public event last week.
As the disaster fund approaches zero, FEMA delays state payments for long-term recovery and enacts an “Emergency Needs Fund” policy that sets aside funds for life-saving emergency response.
“We will always have sufficient funds to respond and ensure that we can support the life-saving efforts that are needed,” Criswell said. “However, if there is an eventual shortage, there will be some impact on our ability to continue ongoing recovery efforts.”
FEMA last imposed emergency funding in August 2017, after Hurricane Harvey caused tens of billions of dollars in damage to Texas. The disaster fund balance decreased to $2.8 billion.
With a balance of $17 billion as of April 30, it faces a deficit as large amounts of money are provided to states to cover the costs of the pandemic.
florida insurance programs
Florida has three insurance programs that pay property claims after extreme disasters. All companies face financial problems and have to impose assessments directly on insurers and policyholders, which can go on for years.
The Florida Hurricane Disaster Fund is a national reinsurance program that pays out excess property claims for insurance companies. The fund, unique to Florida, was created after Hurricane Andrew in 1992 and paid out billions of dollars after Hurricane Ian.
Cash reserves have dwindled to $3.5 billion, a fraction of what is normally available at the beginning of the hurricane season. Reserves from 2014 to 2022 ranged from $11 billion to $14.9 billion as of early June, with an average of $12.8 billion, according to a fund report.
“There’s no question that this is one of the toughest years ever,” Donald Brown, chairman of the fund’s advisory board, said in an interview.
State law allows the fund to borrow money through the bond market and impose debt service assessments on most Florida insurance companies. Brown said the fund’s low cash reserves make it more likely than usual to impose a valuation.
A recent Catastrophe Fund report said it would need to borrow money after a “moderate” storm.
Even if the fund borrows money, it has the financial capacity to pay up to $15.8 billion in claims in 2023-2024, according to a recent fund report. That’s $1.2 billion short of the $17 billion the fund is allowed to pay each year, and could force the fund to defer payment of more than $15.8 billion in claims for a year.
“A delay scenario would be more realistic than a no-payment scenario,” Mr. Brown said.
At least 10 Florida insurers have gone out of business in the past two years because they failed to pay claims. Hundreds of thousands of people are being forced to obtain insurance from the Florida Civil Property Insurance Corporation. The Florida Civil Property Insurance Corporation is a state-sanctioned program that provides insurance to people who cannot be insured by insurance companies.
As of April 30, residents insured 1.3 million properties, nearly three times more than three years ago and more than twice as many as the state’s largest private insurer. The nation’s economic exposure, or total insured assets, is $502 billion. That’s more than four times what it was three years ago.
A recent Citizens report projects that by the end of 2023, there will be 1.7 million policies, generating $645 billion in exposure.
With Hurricane Ian nearly depleting citizens’ reserves and leaving little money to pay out claims, insurance companies are likely to impose assessments after minor storms.
The city’s 2023 budget states that one of its accounts will be “totally depleted” in the so-called once-in-a-decade storm.
A May 16 Citizens report said, “A hurricane hitting Florida is most likely to trigger an assessment.”
A third insurance fund, run by the Florida Insurance Guaranty Association, pays claims to insolvent property and casualty insurance companies. State law authorizes the association to generate insurance claims by imposing assessments on Florida insurance companies.
Since March 2022, the association has imposed three unprecedented valuations to raise up to $1.2 billion.
Various assessments have made Florida insurance premiums skyrocket, making them among the highest in the nation.
“I suspect more and more people will stop buying insurance once their home is paid off,” said Shahid Hamid, a finance professor and insurance expert at Florida International University.
Texas Storm Insurance Association
The Texas Storm Insurance Association is also facing a record financial crisis, and its ability to pay all claims after a major hurricane is questionable.
The association sells insurance to property owners in 14 coastal Texas counties who are not covered by insurance companies. Its financial exposure is $80 billion, the highest since the Texas legislature created the program in 1971.
And as its exposure surged, its cash reserves fell from $800 million a few years ago to an estimated $265 million, the association’s report shows. This year’s balance raises the possibility that the association will have to impose claims assessments on insurers.
A recent audit report stated that a major disaster “could have a severe impact on the association’s financial position.”
Even with debt, the association faces a financial crisis. Combined with reserves and borrowings, the association can pay out up to $4.5 billion in claims this year. This is below the insurer’s insurable capacity of $4.6 billion at the start of the 2018 hurricane season, when it insured only $64 billion in assets.
At an April meeting of the association’s board of directors, Chandra Franklin Womack, chairman of the board, said, “When multiple metropolitan areas are hit by a severe storm, or not necessarily by a severe storm. In that case, $4.5 billion is not a lot.”
The board’s Actuarial and Underwriting Committee, recognizing the increased exposure, recommended in January that the association acquire sufficient reinsurance to cover $5.2 billion in claims. However, due to rising reinsurance costs around the world, the Board chose sufficient reinsurance to pay out $4.5 billion in claims.
The 14-county area has two million inhabitants, with major population areas in Corpus Christi and Galveston.
“If those two regions are hit, there won’t be enough money,” board member Ron Valenta said at an April meeting. “It’s just a statement of truth.”
Louisiana Insurance Program
Louisiana faces a similar situation as Florida. An assessment could be imposed by the Louisiana Insurance Guarantee Association, and liability for the Louisiana Civil Property Insurance Corporation has surged.
The financial troubles, caused by back-to-back Category 4 storms, Hurricane Laura in 2020 and Hurricane Ida in 2021, have forced 11 Louisiana insurers out of business.
The Guaranty Association imposes an assessment of $600 million in 2022, which will cost $875 million to repay, including interest.
“It’s not a good situation for our market that we’re in,” John Wells, the association’s executive director, said in an interview. “This shows that the market is not so good.”
Many property owners “have problems with the availability and affordability of coverage,” Wells added. “Many people have to rely on citizens.”
According to a recent report, the number of policies for Louisiana citizens will surge to 155,000 in 2022, more than triple the number of policies in 2021.
Increased financial risk to the public increases the likelihood that assessments will have to be imposed for post-hurricane insurance payments. Citizens are still collecting assessments to pay off the $1 billion they borrowed after Hurricane Katrina in 2005.
But after Katrina, the most devastating storm in U.S. history, not a single Louisiana insurance company went bankrupt.
“There were some well-capitalized companies,” Mr. Wells said.
It is unclear how much reinsurance the public has purchased to pay for insurance claims in the event of a catastrophe. Civilian officials did not respond to requests for comment.
Reprinted from E&E News with permission of POLITICO, LLC. Copyright 2023. E&E News provides important news for energy and environmental professionals.
