Florida officials estimate that 1,500 people a day move to their state. Climate-change experts will tell you the State of Florida is at greatest risk for damaging hurricanes and tropical storms. Nevertheless, many of these newcomers build or move into high-priced homes along the seacoast where property values continue to soar. All of this makes Franklin W. Nutter, president of the Reinsurance Association of America, shake his head.

"There has been an enormous migration of our population to coastal areas," Nutter told a gathering of high-level scientists, scholars and policy makers at a May 9 session of the National Summit on Coping with Climate Change. "What’s striking to me is that many people don’t factor in their exposure to extreme weather events when making their home-buying decisions."

Currently, 53% of the U.S. population lives in coastal areas. Government has encouraged this unbridled coastal development by building roads, sewer systems and power lines, and by providing or encouraging the provision of insurance.

"The National Flood Insurance Program, adopted in 1968, has clearly facilitated the development of coastal areas, and so has the private-insurance sector," Nutter remarked.

Largely as a result of this subsidized insurance, the current coastal insured value of homes and businesses stands at a staggering $1.9 trillion. "What we’ve done here in the United States is create enormous values in the highest-risk areas," he stated.

The General Accounting Office (GAO) reported in April that the public flood- and crop-insurance programs and the private-insurance community have paid out $320 billion of losses related to catastrophic events since 1980. The combined damage inflicted by Hurricanes Katrina, Rita, Wilma and Dennis alone caused $57 billion of insured losses, arising from 3.3 million claims. But the worst is yet to come, Nutter said. Given this rapid coastal development, $40 billion-plus storms are expected to be more common.

While the private-insurance sector is starting to take climate change into consideration, the GAO reports that the public programs, which face pressure from residents who do not want to pay higher risk-based insurance premiums, are doing nothing.

"The reality is that Florida, which is at greatest risk to extreme-weather events, is facilitating further residential and business development, and is doing so by putting the state’s residents in the insurance and reinsurance business," Nutter explained.

"The way this is funded is that if the Florida Hurricane Catastrophe Fund – a state-administered reinsurance program – and the state’s insurance company, Citizens Insurance Company, do not have the money to pay for the losses, they surcharge the insurance policies of everybody in the state. Residents’ auto policies, professional-liability policies, daycare coverage ─ anything that people have ─ will get an assessment if the state doesn’t have sufficient funds. The question is, Will the state have those funds?"

Nutter reported that Citizens Insurance, which sells residential property-insurance policies to Florida homeowners, has $434 billion of insured coverage in place, 60% of it in the Miami area. But Citizens only has $8 billion in the bank, most of it debt-financed. "If a hurricane hits Miami, the state’s residents will have to pick up the cost," he warned.

Given the current political and social pressures, the insurance industry’s agenda for adapting to climate change includes reinforcing homes, building homes so they are more hazard-resistant, and enforcing building codes.

"We would argue that you should not subsidize insurance, that people should pay based upon risk assessment, and that the state should oversee that," Nutter stated. "Insurance companies in the state should lay off that risk and spread it around the globe to the world’s insurance and reinsurance markets so it’s not concentrated."

More aggressive adaptation strategies include charging homeowners in areas vulnerable to extreme-weather events higher insurance premiums based on risk while giving credits to those who install shutters and build at higher elevations. Energy-efficient technology could also be tied to hazard mitigation. More drastic adaptation steps include repealing the National Flood Insurance Program, which has facilitated development in high-risk areas.

Nutter ended his remarks by citing a 2006 statement on climate change and insurability issued by the European-based Chief Risk Officer Forum, which is composed of chief-risk managers for 13 insurance and reinsurance companies. “This group said that climate change has such a potential for changing the assumptions we make about how to finance the cost of recovery from natural disasters, that insurability may no longer be an option."

The National Summit on Coping with Climate Change, May 8-10, was hosted by the School of Natural Resources and Environment on behalf of the University of Michigan. The summit is part of the Clinton Global Initiative, a non-partisan catalyst for action, established by former President Bill Clinton and the William J. Clinton Foundation for the purpose of bringing together global leaders to devise and implement innovative solutions to pressing world challenges.

By Claudia Capos

For more information, contact Cynthia Shaw at
cshaw@umich.edu or call 734-763-6605.