Catastrophes
Guy Carpenter: Community-Based Catastrophe Insurance Can Close Protection Gap

• John Weber
• June 2021
• 

COVERAGE NEEDED: Community-based catastrophe insurance programs can help low-income residents buy flood insurance.

Insurance plays a critical role in the recovery from disasters, as many households and small businesses don't have sufficient savings to fund repair and rebuilding on their own. Disaster aid can be insufficient and delayed, leaving victims struggling and with uncertain prospects.

That's where community-based catastrophe insurance, or CBCI, comes in. Andy Read, vice president of the public sector practice for Guy Carpenter, spoke with AM Best TV about a recent Guy Carpenter report on this topic. Following is an edited transcript of the interview.

Can you explain this concept of CBCI?

Community-based catastrophe insurance, or CBCI, is essentially when any governmental or quasi-governmental entity arranges insurance, either for or on behalf of its residents or a portion of its residents.

In many cases, this is done in partnership with a private insurance carrier in the market or a reinsurer to bring capacity in.

What exactly are the benefits of CBCI?

First, let's start with setting the context for communities. Many are facing really pronounced protection gaps. Studies continually show that 70% of natural catastrophe losses go uninsured globally. There's a widespread reliance on federal relief after disaster.

On top of that, many communities are facing increasing volatility from climate change. Community-based catastrophe insurance can be a tool for communities to get ahead of that post-disaster relief, drive up insurance in the local community, and be more resilient and prepared for disasters.

It can help a community better understand and communicate risk. It can help a community deliver targeted financial assistance. Perhaps most significantly, it can help [a community] to prioritize mitigation investments and decisions therein.

Have we seen examples of CBCI in the U.S.?

Here in the U.S., there have been several attempts to date which are fundamentally aligned with some of the structures that we lay out in our CBCI concept paper.

For example, a community leveraging its tax relationship to provide a credit or a reimbursement for the purchase of an insurance policy for those in need or in high-risk areas. There's even a pilot project ongoing, where a state is looking at buying National Flood Insurance Program policies for low-income flood-affected [residents]. That's pretty interesting.

There have been a number of conversations and some concepts that have been implemented. Some of the structures laid out would be novel.

We believe there are real opportunities right now for private risk managers and communities to partner to implement these programs and make an impact.

How would a community go about implementing a CBCI program?

Fundamentally, it starts with defining the need, engaging stakeholders and looking at the existing authorities to act within the community.

Private sector expertise can come in and help a community analyze the risk and structure and design a solution therein to help them move forward. There's a spectrum of solutions at play, and the road map to implementation isn't necessarily sequential.

These steps can be revisited as the process continues. You can reengage with stakeholders as you understand better the risk and look at tailoring that structure to meet specific needs. We think that in many cases, communities have existing authorities that they can use to push these programs forward.

What does all this mean for communities that are facing increasing risk?

To start, they can better quantify changes to their risk. They can better understand and communicate their risk, and it allows them to adapt. We see a strong value proposition for this to help communities with climate adaptation strategies.

As communities more directly impacted by climate change start to experience challenges with financials, or costs, or access of capital, we see a CBCI program as a promising tool to help them protect their “balance sheet” and buy down those risk exposures and be more resilient in the long term.

How does this all tie in with national-level policy?

For years, there have been dialogues about how to reduce federal disaster relief expenses or better balance them across state, local, individual and federal [resources]. As those conversations have played out, a few years ago the Disaster Recovery Reform Act was passed, which authorizes the Building Resilient Infrastructure and Communities program that FEMA [Federal Emergency Management Agency] is now implementing.

What that does is it tries to shift the spending forward ahead of disasters. It takes 6% of obligated disaster funding in a given year and puts it in an account for pre-disaster mitigation the following year.

Congress is taking steps to reduce post-disaster spending and drive up mitigation, which is very meaningful for communities. We see real opportunity for communities to engage in a CBCI program that's completely aligned with the intent of that program to improve their capability.

We think that this complements quite well with what the federal policy trends are currently moving toward and it, importantly, is a tool for communities.

Any thoughts on where CBCI might be headed?

We hope it's headed for widespread discussion and adoption. It would be great to see a number of communities leveraging partnerships with private risk carriers to engage new segments of the market, potentially, and bring new consumers to the insurance market with innovative and new products.

That said, we think there is a space for traditional products that industry is already very familiar with, to work hand in hand with communities to apply here.