The Next Flood

In “Reauthorizing the National Flood Insurance Program” (Issues, Winter 2018), Howard C. Kunreuther raises several points that are germane to the Insurance Information Institute’s mandate to “improve public understanding of insurance—what it does and how it works.” One point in particular goes to the heart of why my organization believes that the pending renewal of the National Flood Insurance Program (NFIP) presents an ideal opportunity to modernize the program. After 50 years of existence, the NFIP has become financially unsustainable (per a report from the US Government Accountability Office). Yet even with the NFIP as a backstop against a total loss, an average of only 14% of the 3.3 million households in counties declared federal disaster areas after Hurricane Irma ravaged Florida in September 2017 had NFIP coverage. Equally frustrating are the reasons why many people decline to purchase coverage, including a lack of awareness that flood-caused damage is not covered under their homeowners, renters, or business policies; underestimating flooding risk; and the cost of coverage.

Proposals in Kunreuther’s article include behavioral risk audits and other tools to better understand how homeowners, renters, and business owners view and rationalize risk; a call for Congress to provide increased investment in producing more accurate flood maps; and premising NFIP reauthorization on the adherence to “the guiding principles for insurance.” These also happen to be principles long embraced as core values of private insurance carriers, which are stepping up to expand insurance options available to residential and business customers. Recently, the NFIP and the Federal Emergency Management Agency (FEMA) have publicly embraced this sort of competition as a way of improving flood insurance for all. Indeed, the NFIP’s prospective expanded investment in reinsurance and the purchase of its first-ever catastrophe bond to contend with the realities of flood risk are positive steps toward finding private-sector solutions to existing problems.

We applaud Kunreuther’s call to make the NFIP “more transparent, more cost-effective, more equitable, and more appealing to property owners.” Moreover, we share his conclusion that a successful, more evolved NFIP would benefit greatly by building on the “support and interest of real estate and insurance agents, banks and financial institutions, builders, developers, contractors, and local officials concerned with the safety of their communities.”

Sean M. Kevelighan

Howard Kunreuther identifies a central challenge when it comes to reducing flood damage: motivating people to take action ahead of time. The systematic biases that he articulates (myopia, amnesia, optimism, inertia, simplification, and herding) apply not only to purchasing insurance but also to making life-safety and property-protection decisions before, during, and after disasters. These biases result in a serious protection gap that stymies efforts to improve the National Flood Insurance Program and hampers mitigation efforts to reduce damage from wind, hail, wildfire, winter storms, and other severe weather.

Kunreuther writes, “A large body of cognitive psychology and behavioral decision research over the past 50 years has revealed that decision-makers (whether homeowners, developers, or community officials) are often guided not by cost-benefit calculations but by emotional reactions and simple rules of thumb that have been acquired by personal experience.”

Intuition will get you only so far, and it’s not far enough to push back against the wiles of Mother Nature. To meet Kunreuther’s challenge we need well-founded, realistic, scientific testing and research on building systems subjected to real-world wind, hail, wind-driven rain, and wildfire conditions.

The Insurance Institute for Business & Home Safety (IBHS) that I lead not only takes on this challenge of sound building science, but also educates consumers on how to put that insight into action. Groundbreaking building science findings need to be translated into improved building codes and standards as well as superior design, new construction, and retrofitting standards that exceed building code requirements. Yet in translating our work into bricks-and-mortar improvements, we are confronted with the same risk biases that undermine sound NFIP purchase decisions.

The cognitive psychology and behavioral decision research cited by Kunreuther has opened our eyes to the impediments to rational risk management behavior. A discipline once confined to classrooms and conferences now fills Kindles and personal studies in books such as Misbehaving; Nudge; and (my favorite) Thinking, Fast and Slow. That’s progress, but the next step is to translate these ideas into messages and strategies that change the way people think about risk and act to reduce it. In this regard, we support Kunreuther’s idea of conducting behavioral risk audits to promote a better understanding of the systemic biases that block appropriate risk decision-making and set the stage for development of strategies that work under real-world conditions.

While at the Federal Emergency Management Agency, where I worked prior to joining IBHS, we launched two ambitious moonshots: the first, to double the number of policyholders with flood insurance, and the second, to quadruple mitigation investment nationwide. Achieving these goals will require dedicated efforts by government, the private sector, and the nonprofit community. To best cope with rain, flood, hail, wind, wildfire, earthquakes—choose your peril—we need a whole set of players to put in motion actionable strategies that, as Kunreuther suggests, “work with rather than against people’s risk perceptions and natural decision biases.”

Roy Wright