Helene’s destruction puts spotlight on costly gaps in homeowners insurance

With at least 230 people dead across six states, Hurricane Helene is proving to be one of the deadliest U.S. storms in recent history. And property and economic losses are estimated to be as high as $250 billion. But the insurance industry says that as little as $5 billion of that is covered by insurance. After weather events like hurricanes, tornadoes and flooding that climate change is making more frequent and more severe, homeowners can get a rude awakening about what their insurance does and doesn't cover. Jeffrey Slegomelch is director of the National Center for Disaster Preparedness at Columbia University. Mr. Slegomelch, in western North Carolina, which really got hard hit by flooding in this storm, it's estimated that fewer than 1 percent of the households were covered by flood insurance. What does that mean for the recovery? What does that mean for homeowners? What does that mean for the region? Yeah, unfortunately, what this means is that for many of the people who are affected by the flooding, they're not going to have the additional funds that would be made available through their homeowners insurance or business insurance or plans like that. There are some mechanisms through federal programs and federal assistance that we would expect to see, although that generally is at a much lower amount and can generally take some of those programs can take a little bit longer to come to fruition. So it just means that people will have less access to some of those financial resources than those that were fortunate enough to have insurance ahead of the storm. Could that also mean that there's some places that just won't be rebuilt? Possibly, yes. Unfortunately, when we see disasters like this, we'll see areas that are high visibility that do get rebuilt very quickly, but it becomes a sort of a very big challenge in terms of what resources do you have and would you want to rebuild? Would you want to put in all of your own money above and beyond what little assistance you can get to rebuild? It certainly does mean that we should expect to see a slower recovery and one that is much more dependent on public assistance or philanthropic assistance than would come from the mechanisms like we would see in a higher insured area. Beyond North Carolina, across the country, are there many households that lack flood insurance that probably should have flood insurance? Yes, and this is for a couple of different reasons. One of them is that the flood maps that we use to actually tell us where the areas are at the highest risk don't necessarily cover risk, both in terms of our current knowledge, but also integrating climate change into that. In particular, they're not really great at smaller riverine basins, the kinds we see in more of the mountainous areas like we see in western North Carolina. If you are in one of those floodplains, in one of those maps, most likely your lender is going to require you to have insurance. But outside of that, it's not necessarily something that we think about or really look at if you're not in one of those maps and if you're not required to get flood insurance. Are there places that might not have been on one of those maps in the past, but given the changes from climate change, given the more intense, more severe storms, that it ought to be prudent now? Absolutely. And I think all homeowners, certainly those who would have the means to do so, should take a look at what flood insurance would cost, even if they're not necessarily in a floodplain. It's worth noting that oftentimes this is related to risks. If you're in a lower risk area, it shouldn't cost as much. But we are seeing storms like this. We've seen thousand-year flood events. We've seen flood events that are hitting areas with very little coverage of flood insurance because these are areas that typically weren't at risk historically, but we're seeing larger and larger amounts of rainfall and just greater exposure to hazards than we have before. And help us understand flood insurance. This is not insurance from private insurance companies, right? Well, so the insurance you buy comes from a private insurance company, just like any other kind of insurance. But it's backstopped by the National Flood Insurance Program. Something like 95% of all of the policies that are issued are issued through the National Flood Insurance Program. So that's ultimately backstopped by the federal government, who then engages in some relationships with different tax dollars through the Treasury, but also increasingly lately through things like reinsurance markets and other types of private markets to help cover that. So you would still go and purchase this the way you would other kinds of insurance through a private insurer, but it is underwritten and ultimately backstopped through the National Flood Insurance Program. What's this doing to the insurance industry with greater storms, bigger storms in hurricanes in Florida, wildfires in California? Yeah, to be totally honest, it's putting them under. A lot of insurers are pulling out of areas with high hazards. We've seen this in California and other wildfire prone areas. We're seeing it in markets like Florida and Louisiana, where they're just increasing losses as a result of storms. And they have to pay out these record payouts. They just don't have a recourse in order to stay viable in doing business in these circumstances. So it's putting tremendous pressure on the insurance industry. So at a time when we're seeing increased need for it in terms of having the resources to recover from a disaster, we're seeing many insurers just not able to afford to be able to stay in the game here, making it more expensive or non-existent to people who would need to access it. There's some people who make the argument that insuring the losses from these events is encouraging or incentivizing people to live in dangerous areas. What do you say to that? This is a really, really important point. And it's part of the reason. So the National Flood Insurance Program has had short-term extensions since 2017. I think everybody agrees that this is a problematic situation, that we're actually artificially reducing the cost, reducing the financial risk of living in places that are actually exposed to hazards. To that, though, that I say is that a lot of people are already living there. You already have your homes there. And we saw this about a decade ago when they tried to right-size some of the insurance rates. Basically, if you're in a riskier area, you have to pay more. Those subsidies start to go away. Then you saw entire communities with homes, most individuals' largest source of wealth and how you build generational wealth, all of a sudden uninsurable or insurable at a cost they couldn't afford, property values dropping off because of this. So in the abstract, it's absolutely true, right? We're creating what economists call a moral hazard where we're basically not properly disincentivizing living in dangerous areas. But the fact of the matter is people already live there. And this is a major part of our economic viability as individuals, as businesses, as communities. And we don't really have a good answer on how to right-size the risk with so many homes already there. So it's a big challenge. And that's reflected in not really having a long-term extension of the National Flood Insurance Program or really a long-term game plan on how we're going to fix this problem with insurance. No good answer on right-sizing the risk. But if you were to change this program to make it better, better, make it work better for both sides, what would you do? Well, I think the key to this is not actually increasing the size of the insurance market. And that'll help with some things in terms of increasing risk pools. But it's actually preventing the damage from disasters in the first place. One of the things that's really important to remember is that even if 100 percent of these homes in Western North Carolina that were affected by Hurricane Helene were covered by flood insurance, they would still be destroyed. The physical damage would still be there. So insurance helps to transfer the financial risk. It doesn't transfer the physical risk. And so that's where we need much, much more money put into building codes, disaster mitigation, climate mitigation, reducing emissions, all the things that prevent this from happening. And study after study shows that that actually saves a heck of a lot more money by preventing the loss of lives and livelihoods and damage to properties. And it's really the only way to truly take pressure off the back end, because what's really draining the insurance isn't necessarily just the design of the insurance, but the fact that there are huge payouts because of the damage that's being caused as a result of these major events. Jeffrey Slugamilch of Columbia University, thank you very much. Thank you.