Disaster Mitigation: How Incentives Can Help

The frequency and cost of natural disasters in the United States has increased exponentially in the past two decades. The cost to property, life and the economy is pushing the issue to the top-of-minds for many in Washington, D.C., local governments and the insurance industry.

While the insurance industry plays an important role in disaster recovery such as hurricanes, storms, tornadoes and wildfires, on average, insurance covers just one-fifth of all disaster-related losses. Since 1983, the United States government has spent nearly $1 trillion on disaster recovery and rebuilding efforts.

For decades, the federal government has been forced to increase disaster funding in the middle of fiscal years to meet the rising costs. Supplemental disaster funds were appropriated in 17 of the 22 budget years between fiscal year 1989 and 2010, according to the Congressional Research Service.

The issue has become severe enough that some are advocating for an intervention of sorts.

“We’re at a point in this country where the severity of the weather that’s occurring and the cost – not just the financial cost but the emotional cost – have become too large to bear,” said Mark Pizzi, president and chief operating officer of Nationwide Insurance who also serves as the board chairman for the Insurance Institute for Business & Home Safety (IBHS). “There is a need for intervention.”

The intervention must come through public and private partnerships that encourage disaster mitigation efforts, as well as incentives that boost mitigation tools among consumers, according to Pizzi.

Action must be taken to make homes and businesses stronger and more resilient, Pizzi says.

Incentives like building permit rebates, state-level tax incentives, and state and federal grants could lead to more resilient communities that could lower costs.

While government incentives are critical, Pizzi says insurance companies also must do their part to motivate consumers to fortify homes and businesses by providing incentives of their own.

“Insurance companies can offer discounts to consumers and business owners who fortify their structures. They also can offer insurance products that will help rebuild storm-damaged homes and businesses to fortified standards,” Pizzi said.

IBHS studies show that homes and businesses fortified by stronger building materials and construction practices are more likely to survive extreme weather events that otherwise would severely damage or destroy them.

“We know that mitigation works,” says Robert Detelfsen, vice president of public policy for the National Association of Mutual Insurance Cos. (NAMIC). “There’s been any number of studies that show that losses from natural disasters are considerably reduced when you have effective mitigation taking place.”

Yet, the majority of disaster aid is spent on disaster response, and not mitigation.

According to a joint report, funded by the Z Zurich Foundation, in the past two decades, nearly $9 out of every $10 of U.S. aid was spent on emergency response, reconstruction and rehabilitation, with only $1 in $10 going toward mitigation.

The report, part of a multi-year academic cooperation between Zurich, the Center for Risk Management at the Wharton School of the University of Pennsylvania and the International Institute of Applied Systems Analysis (IIAS), proposes a framework to measure the ability of communities to withstand floods, quantify the success of flood resilience efforts and demonstrate the benefits of pre-event risk reduction as opposed to post-event disaster relief.

“To help reduce flood losses and help communities in both developed and developing countries improve flood resilience, it is imperative that we focus more on mitigating risks and preparing for floods, rather than simply dealing with the consequences after a flood occurs,” said Dan Riordan, CEO of Zurich Global Corporate in North America.

Like Nationwide, Zurich and others in the industry are boosting efforts to improve sustainability and resiliency to natural catastrophes and encouraging the government to implement legislation that would incentivize states to comply.

Government in Mitigation

Most mitigation occurs at the local level but funding for municipal mitigation projects often comes from federal dollars. FEMA oversees and manages programs including the Hazard Mitigation Grant Program, Pre-Disaster Mitigation and Flood Mitigation Assistance programs. But more could be done especially when it comes to encouraging stronger and more resilient buildings, the experts say.

Detelfsen, who represented NAMIC as a member of The BuildStrong Coalition in a recent Senate hearing on “The Role of Mitigation in Reducing Federal Expenditures for Disaster Response,” says model building codes and superior construction standards can play a huge role in reducing the costs of natural disasters.

That’s why BuildStrong – a group of national business and consumer organizations, firefighters, emergency managers, building professionals and insurance groups – strongly advocates incentive-based approaches to spur more states to adopt statewide model building codes.

“The purpose of model building codes is to ensure that minimum standards are used in the design, construction, and maintenance of the places where people live. Building codes are intended to increase the safety and integrity of structures, thereby reducing deaths, injuries and property damage from a wide range of hazards,” Detelfsen said.

BuildStrong has made S. 924, The Safe Building Code Incentive Act, its signature priority. The goal of this legislation is to increase the number of states with minimum construction standards.

BuildStrong is also a strong supporter of S. 1991, The Disaster Savings Account of 2014, which provides an incentive for homeowners to make their homes more resilient through a tax-free savings account to be used on mitigation activities, and supports H.R. 2241, The Disaster Savings and Resilient Construction Act of 2013, which provides a tax credit to businesses or homeowners who rebuild to resilient construction standards in declared federal disaster areas.

Model Codes

Model building codes help ensure safety and soundness of homes but also allow for economies of scale in the production of building materials and construction, as well as create a level of safety for first responders during and after fires and other disasters.

The Safe Building Code Incentive Act is a mechanism by which states are incentivized, not mandated, to adopt and enforce model building codes. The proposed legislation would provide an additional 4 percent of post-disaster recovery funds to all states that adopt and enforce model codes. The incentive is meant to encourage more states to rebuild to higher standards in order to eventually reduce the need for more disaster recovery money.

In recent years, there have been several significant studies that support the conclusion that enforcing model statewide building codes saves lives and greatly reduces property damage and the subsequent need for federal disaster aid.

Uniform, statewide codes also promote a level, predictable playing field for designers, builders and suppliers, says Julie Rochman, president and CEO, IBHS.

But Rochman says it’s important for people to understand that building codes are a minimum standard.

“It is literally life safety code. It’s the minimum threshold at which you can occupy a building,” she said. “It’s not meant to protect against natural hazards, although in coastal areas and in some seismic areas like the West Coast there are provisions in code that address natural hazards, but overwhelmingly they provide only a minimum threshold of safety.”

Rochman says IBHS’ stronger, safer Fortified standards offer better hazard and safety protection. But achieving fortified building code standards in some states is almost impossible because even today some states do not have minimum building code requirements.

“We still have about a dozen states in this country that don’t have a statewide building code,” she said. Several other states have building codes but do not universally enforce those codes.

People always find that surprising, she says. “How can a state like Illinois, not have a building code? They don’t. Oklahoma doesn’t. Arkansas doesn’t. And if you look at the states where you’ve had a lot of tornadoes recently, there’s no code.”

Even in some states where there is a code, that code doesn’t address natural hazards, Rochman explained.

“States and localities have a responsibility to help keep their citizens safe,” she said. That’s what codes and standards like Fortified do. They help keep people safer and they make their homes stronger. They’re not disaster proof, but they are stronger and safer.”

Congressional Support

Detelfsen says that so far support from Congressional leaders has been positive.

“We certainly got a very favorable response from the Chairman of the Senate Committee who presided over that hearing, and I think that everything we’ve heard from members of Congress is pretty positive,” he said.

There is some concern over the additional disaster assistance states would receive in exchange for adopting strong building codes, he said, and whether the incentive would drive a net increase in federal outlays for disaster assistance. But the industry and other BuildStrong supporters say improving building codes nationwide would result in net savings to the federal government.

“Any additional amounts of money that were promised to the states in exchange for them adopting stronger building codes would be offset by the effect that the building codes would have on disaster loss reduction,” he said.