Natural Disaster Preparedness

What is it?  Catastrophic natural perils are unpredictable, relatively infrequent, and often financially disastrous to property owners and insurers alike. The magnitude of the potential losses from these threats is increasing due to population growth and property development in catastrophe-prone areas. This trend will impact the availability of private property insurance, particularly in the imperiled areas.

In the wake of natural catastrophes, public policy discussions have focused on two primary areas: adoption of loss prevention strategies that will reduce the impact of future disasters, and development of plans to provide economic protection for those who dwell in areas exposed to mega-catastrophes.

The scale of the problem in coastal areas is increasing due to growth of population and property in harm’s way:

• In 2003, the U.S. Census reported that 53 percent of the nation’s population lived in coastal areas.
• Between 1980 and 2003, the population of coastal counties grew 28 percent.
• In 2004, the value of insured coastal property in hurricane prone states exceeded $6.9 trillion.

Between 1988 and 2005, the total amount of all catastrophe losses for State Farm alone exceeded $42 billion and total insurance industry losses were of a similar scale. The time to address preparation for major natural catastrophes is now – before the unthinkable but inevitable occurs.

How can I prepare for a natural disaster?

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What do others say?

• To help build consensus for action, State Farm has joined ProtectingAmerica.org, a coalition of individuals and organizations dedicated to improving America's preparedness for natural disasters. State Farm will work with ProtectingAmerica.org and other interested groups to pursue state and federal solutions consistent with our position, and to educate the public about the importance of this comprehensive and coordinated approach to better natural disaster preparedness.
• Catastrophe Modeling - Insurance Information Institute white paper

What is State Farm’s position?  State Farm believes our nation’s current disaster recovery system leaves too many people unprotected and unable to rebuild their lives following a catastrophe.  Solutions are needed to better prepare and protect America from major catastrophes in a sensible, cost-effective fashion. The private insurance market – on its own – has insufficient capacity to handle exposures for catastrophic natural disasters and still cover all of its other insurance obligations.

In an effort to increase the availability of needed property coverages, and minimize the federal dollars spent on disasters, State Farm supports a coherent, comprehensive and coordinated approach involving the American citizenry, private insurers, and local, state and federal governments.  We don't pretend to have all of the answers, but we do believe the solution should include:

• Adoption of modern and effectively enforced statewide building codes across the country.
• Consumer Education – Effective education about the risks and responsibilities associated with living in catastrophe-prone areas and about appropriate insurance coverage, including an understanding of what is, and what is not, covered under their policies.
• Emergency Response Coordination – Comprehensive coordination of logistical issues between the emergency management and insurance response systems with regard to humanitarian, health and safety, housing, communication and access issues.
• Establishment of properly constructed state catastrophe funds in catastrophe-prone states.
• Creation of a financial safety-net at the federal level for events exceeding the capacity of state catastrophe funds.

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Building Codes and Land Use

What is it?  Building codes are minimum acceptable standards used to regulate the design, construction and maintenance of buildings for the purpose of reducing death, injuries and property damage. Building codes contribute to the durability of buildings and help maintain quality of life and property values.

State building code standards vary widely across the country. Most states have not enacted statewide building codes and related inspection and enforcement measures for one- and two-family homes. Where statewide codes exist, cities or counties often deviate from the state standard and weaken the codes.

Overwhelming evidence demonstrates that the adoption and enforcement of modern statewide building codes based on nationally recognized standards greatly reduce property damage and personal injury resulting from disasters. They allow communities to experience a minimum disruption of life and economic activity following such events.

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Modern statewide building codes and their effect on a community:

• In the event of a natural disaster, building codes can reduce the need for public and private disaster aid.

• Modern building codes allow communities to experience minimum disruption of life and economic activity following natural disasters.

• We believe all families, including low and moderate-income families, should be afforded the building standards that have been proven to protect lives and preserve property. Often lower income families are left out during the construction and rehabilitation of their homes, which leads to sub-standard living conditions and increased maintenance expenses.

• Modern building codes can promote a degree of comfort for buyers who can rely upon minimum construction standards for the safety and soundness of a building.

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What is State Farm’s position?  As the nation’s largest homeowners insurer, State Farm supports the construction of homes according to nationally recognized modern building codes.

State Farm supports the adoption of modern statewide building codes, applicable to one- and two-family homes, based on a nationally recognized model. State Farm is a charter member of the Building Code Coalition, a group of insurers, trade organizations, safety groups and consumer organizations that support the adoption and enforcement of building codes to help avoid needless property damage and promote personal safety.

As Congress and state lawmakers consider the many aspects of the recovery process following natural disasters and planning efforts to help recover from future events, State Farm and the Building Code Coalition are taking action to ensure that building codes are an important part of the discussion.

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National Flood Insurance Program

What is it?  The U.S. Congress created the National Flood Insurance Program (NFIP) in 1968. Under this program, participating insurers – including State Farm – sell and service flood insurance policies issued by the federal government. Currently NFIP policies provide maximum coverage of $250,000 for dwellings and $100,000 coverage for contents. No additional living expenses (ALE) coverage is available.

Congress is also considering several reform measures for the NFIP and recently conducted hearings to discuss these proposals, including the following:

• Increasing coverage limits from current limits of $250,000 for dwelling and $100,000 for contents
• Adding an Additional Living Expenses benefit
• Modernizing flood maps to include more than the expected and natural flood plains
• Increasing deductibles
• Offering additional or “deluxe” policy options, such as purchasing additional coverage or coverage for basements.

Why is it Important? The NFIP was created to address mounting flood losses and escalating costs of disaster relief to the general taxpayers. Realizing the magnitude of flood loss and the likelihood of adverse selection, private insurers excluded flood coverage under homeowners insurance policies. Without the NFIP, many homeowners would be without flood coverage.

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What do others say?  Reform proposals are being discussed among the insurance, real estate and mortgage industry. Reforms discussed include adding coverage for perils other than flood, increased coverage limits, adding Additional Living Expenses coverage, modernized flood maps, increased deductibles, and additional policy options (such as coverage for basements). It is important that any reforms address the balance between improving the NFIP and maintaining its affordability.

Congress is currently considering HR 3121, the “The Flood Insurance Modernization Act of 2007.” Among the significant changes proposed by the Act are:

1. Increasing flood insurance coverage for residential property.
2. Providing coverage for necessary increases in living expenses, basement improvements, business interruption and replacement cost of contents.
3. Providing for notification to tenants of the availability of contents insurance.
4. Increasing the borrowing authority for the flood insurance program.

The new limits for coverage would be:

1. An increase from $250,000 to $335,000 for residential dwelling structure coverage.
2. An increase from $100,000 to $135,000 for residential contents coverage.
3. An increase from $500,000 to $670,000 for business coverages (this will mean a maximum of $670,000 for structures and another $670,000 limit for contents).

These NFIP reforms generally have the support of the insurance industry.

What is State Farm's Position? State Farm supports changes to the federal flood program that:

• Address the balance between improving the NFIP and maintaining its affordability.
• Ensure the availability and purchase of adequate coverage to protect property owners against flood damage.
• Are based on actuarially sound rates.

State Farm does not support the expansion of the federal flood program to incorporate other perils, such as wind.

It is essential to complete reforms to the NFIP first, before considering an expansion of the program. According to a Towers-Perrin study commissioned by the American Insurance Association, if wind coverage is added to the NFIP, “program deficits from catastrophic wind events in a single year could be $100 to $200 billion.”

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