Mitigating Hurricane Losses

For years, insurance companies have offered premium credits or lower insurance rates to customers who take steps to prevent fire, liability, and other losses. Today, insurers are also developing and implementing programs designed to reward customers who mitigate hurricane losses.

When a major hurricane comes ashore in a populated area, some property loss is inevitable. But sturdy construction of buildings and the addition of protective devices, such as storm shutters, can reduce losses. And strong building codes — rigorously enforced — should prevent much of the economic dislocation and human suffering that hurricanes typically bring to a community.

Lower Rates for Sturdy Construction
For more than 200 years, insurers have encouraged sound construction practices by offering lower rates for properties less susceptible to damage. [8]8. As early as 1795, the Insurance Company of North America was offering fire insurance at one rate for brick or stone houses and at a considerably higher rate for houses not wholly brick or stone.

Today, ISO's programs [9]9. ISO develops advisory insurance policy programs that many insurers use as the basis for their own coverage offerings. ISO's programs include standardized policy language, rules for writing and rating policies, and advisory pricing information that insurers can use in developing their own rates. for personal and commercial property recognize that different kinds of construction — wood frame, masonry, and others — differ in their susceptibility to windstorm damage. In addition, ISO's commercial property program recognizes that other factors — building height, reinforcement of masonry walls, strength of steel frames — also affect the ability of buildings to resist wind.

ISO publishes information about loss costs for each type of structure. Insurers can use such information to help in determining fair, actuarially sound rates. Such rates reward customers whose properties have loss-resistant characteristics.

Credits for Storm Shutters
Storm shutters or other protective devices for doors, windows, skylights, and vents can also mitigate hurricane losses. Insurers have begun offering credits that reduce premiums for customers who install such devices.

For example, following legislative action in Florida and New York, ISO has updated its homeowners programs in those states to include credits for storm shutters. In Florida, the credits vary by territory and type of policy and apply to policies that cover the perils of windstorm and hail. To qualify for the credits, property owners must install storm shutters, hurricane-resistant glazing material, or acceptable alternatives that protect all openings in external walls and roofs. The devices must be able to withstand a specified wind pressure. Property owners can qualify for additional credits by installing devices that can also meet specified standards for withstanding impact from wind-driven debris.

Homeowners across the state of New York can qualify for credits by installing storm shutters or hurricane-resistant laminated glass meeting specified standards for withstanding wind pressure and the impact of wind-driven debris.

The Building Code Effectiveness Grading Schedule
After Hurricane Andrew, photos taken in several parts of south Florida showed homes on one side of a street completely destroyed, while homes on the other side were still standing.

Later studies determined that, in many cases, the construction of destroyed buildings was well below the standard required by the building code in effect. Studies also found that inadequate enforcement of building codes may have contributed to the poor quality of construction. [10]10. See, for example, Federal Emergency Management Agency, Federal Insurance Administration, Building Performance: Hurricane Andrew in Florida: Observations, Recommendations, and Technical Guidance, 1992, and Sherman C. Edmondson, "Hurricane Andrew: Did it have to be this bad?," Building Official and Code Administrator, November-December 1992, 26, 40-51.

Such discoveries led to an insurance-industry initiative to encourage sound construction — the Building Code Effectiveness Grading Schedule (BCEGS). Developed by ISO in cooperation with the Insurance Institute for Property Loss Reduction (now the Institute for Business and Home Safety), local building officials, insurers, and the three major organizations responsible for developing model building codes, BCEGS encourages communities to adopt stringent codes and to enforce them rigorously.

The concept is simple: buildings in municipalities with effective, well-enforced codes should have better loss experience, and insurance rates can reflect that. The prospect of reducing catastrophe-related damage and lowering insurance costs provides an economic incentive for communities to strengthen building codes and their enforcement — especially as the codes relate to windstorm and earthquake damage.

Under BCEGS, ISO assesses the building codes in effect in a particular community, as well as how the community enforces its building codes. ISO classifies the community on a scale of 1 to 10, with 1 representing exemplary enforcement of a model code and 10 indicating no recognizable code enforcement. ISO groups the 10 BCEGS grades into bands and assigns rating credits to each band. Under ISO's program, newly constructed (or substantially rebuilt) properties in communities in the first band (grades 1 to 3) are eligible for the largest credits. Properties in communities in the second and third bands (grades 4 to 7 and 8 to 9) are eligible for smaller credits. And properties in communities with a grade of 10 do not qualify for credits.

In general, under ISO's BCEGS program, credits are available only for buildings constructed (or substantially rebuilt) during or after the year when a community receives its grade. However, the program has a provision allowing certification of individual older buildings, thus making them eligible for credits.

Credits vary by state, rating territory, type of policy, and coverage. The amount of the credit varies by state or territory because the risk of hurricanes and earthquakes varies by location.

To date, ISO has evaluated almost 4,600 communities around the country, and insurance regulators in 48 states have approved premium credits for communities with good BCEGS grades. The BCEGS program has the potential, over time, to help improve the quality of buildings in communities around the country. That, in turn, could reduce catastrophe losses — both insured and uninsured — and human suffering.

FEMA's Project Impact
The Federal Emergency Management Agency (FEMA) helps people repair and rebuild their communities after natural disasters. But now, with Project Impact: Building Disaster-Resistant Communities, FEMA is changing the way America deals with disasters. At the core of this effort is the belief that we can come together to create active public-private partnerships that will build disaster-resistant communities.

In October 1997, FEMA originated pilot projects with 7 communities across the country. Today, FEMA has nearly 200 Project Impact communities, and more than 1,100 businesses have joined as Project Impact partners.

Under Project Impact, FEMA helps local communities develop and implement long-term loss-mitigation plans. Steps include:

• building alliances among private industry, community groups, and various levels of government
• identifying and assessing local hazards
• evaluating and prioritizing mitigation measures
• implementing long-term plans to protect the community
• sharing information with the community

FEMA also helps the communities obtain the latest mitigation technologies. In support of Project Impact, the agency provides seed money that communities can use for planning, for executing projects, for providing public education, and for attracting matching funds from other partners.

Dozens of hurricane-prone communities participating in Project Impact have already taken significant steps toward making themselves disaster-resistant.

For example, the City of Deerfield Beach, Florida — the first Project Impact community — has developed a business alliance that has undertaken important projects aimed at reducing hurricane losses. In addition, the city has:

• relocated critical city services to one disaster-resistant building
• retrofitted a school to serve as a safe shelter
• developed a program to encourage retrofitting homes to withstand hurricanes
• partnered with Broward County to develop a Community Emergency Response Team (CERT) training program, which, by the summer of 1999, had graduated 75 local residents

IBHS Showcase Communities and States Programs
Complementing FEMA's Project Impact are the Showcase programs of the Institute for Business & Home Safety (IBHS). IBHS is a nonprofit corporation formed and funded by insurers and others dedicated to reducing the deaths, injuries, property damage, economic loss, and human suffering caused by natural disasters.

The Showcase initiative began with two communities, Evansville/Vanderburgh County, Indiana, and Deerfield Beach/Broward County, Florida. Realizing that broader support can enhance the effectiveness of community mitigation programs, IBHS shifted its focus to the state level, beginning with a Showcase State designation for Rhode Island. IBHS's statewide work and FEMA's efforts at the community level create a framework for realizing the benefits of organized mitigation activities. The programs bring together the talents and resources of diverse public- and private-sector partners to design and implement projects that reduce losses.

The objectives of the IBHS Showcase States program are:

• to support a state's efforts to help its communities reduce their vulnerability to hurricanes and other natural disasters
• to encourage other states and their communities to follow the lead of the showcases
• to learn what works and does not work to reduce the devastation caused by natural disasters

IBHS is publicizing Rhode Island's progress and successes and has started working with other states to implement the Showcase program.

8. As early as 1795, the Insurance Company of North America was offering fire insurance at one rate for brick or stone houses and at a considerably higher rate for houses not wholly brick or stone.

9. ISO develops advisory insurance policy programs that many insurers use as the basis for their own coverage offerings. ISO's programs include standardized policy language, rules for writing and rating policies, and advisory pricing information that insurers can use in developing their own rates.

10. See, for example, Federal Emergency Management Agency, Federal Insurance Administration, Building Performance: Hurricane Andrew in Florida: Observations, Recommendations, and Technical Guidance, 1992, and Sherman C. Edmondson, "Hurricane Andrew: Did it have to be this bad?," Building Official and Code Administrator, November-December 1992, 26, 40-51.