Equitable Adaptation Legal & Policy Toolkit

 

Insurance-Related Finance

Another recent approach to financing resiliency measures is to translate insurance savings into a revenue stream for community adaptation projects.See footnote 1 This can occur, for example, when adaptation measures increase the likelihood that insurance companies will avoid losses tied to climate change. In exchange for the increased likelihood of savings, insurance companies reduce premiums and the premium cost savings are used to pay for the adaptation measures. The group MyStrongHome provides one such example.See footnote 2 This organization reduces risks for insurance companies by retrofitting homes with new roofs. Insurance companies, in response, reduce insurance premiums for the homeowners.

The federal government’s National Flood Insurance Program (NFIP) similarly supports the capacities of communities and individuals to invest in resiliency measures that reduce climate change-related risks, including measures to maintain river levees, remove buildings from floodplains, and inform individuals of approaches to reducing flood-related risks.See footnote 3 The NFIP provides flood insurance premium discounts to communities that implement local mitigation and floodplain management measures exceeding NFIP requirements, as measured through a Community Rating System (CRS).See footnote 4 Any community in full compliance with minimum NFIP floodplain management requirements can apply to join the CRS. The FEMA website provides examples of the ‘best of the best’ community efforts to reduce flood insurance premium costs. Floodplain management activities in Roseville, CA, for example, provided an average premium discount of $963 per year.See footnote 5 For clearing more than 900 buildings from its floodplains, Tulsa, Oklahoma communities received an average discount of $709 per year.See footnote 6 And for maintaining over 80 miles of river levees and providing information to residents in floodplains, Pierce County, Washington communities received an average premium discount of $846 per year.See footnote 7 Despite its potential benefits, the NFIP also includes a few shortcomings, including that rising insurance rates threaten to price many out of coverage and outdated floodplain maps fail to adequately reflect risks.

Examples of possible areas for which local governments and authorities can work with the insurance industry to finance community-scale adaptation include the following: (1) large-scale protection projects; (2) individual or aggregated property-level interventions; and (3) network improvements.See footnote 8

The large-scale protection project approach works best when there is: (1) a large risk (high expected losses), e.g., when coastal community structures might be wiped out by flooding in the absence of a flood protection wall; (2) existing insurance coverage shared by a significant number of beneficiaries (from which to capture savings); and, 3) a significant risk reduction solution, (e.g., a flood protection wall).See footnote 9 Project financing can be based on projected insurance savings captured through the project. On this point, it has been noted, “[j]ust as private investors in a toll road use forecasted toll revenue as the basis for investing in the project, investors in a protection project would provide the upfront capital to implement a protection project based on the forecasted insurance savings.’See footnote 10 

When conditions for insurance-based financing of large-scale protection projects do not exist, individuals can act alone or in coordination with other individuals. For individual or aggregated property-level interventions, savings in property insurance, and/or property taxes can be used to pay back loans or bonds used to finance the project. My Strong Homes supports such individual property-level interventions.See footnote 11

Finally, insurance-based financing can potentially fund network improvements — including improvements to transit, transportation infrastructure, and water systems.See footnote 12 Impacts on transit systems are of particular significance for low-to-moderate-income riders with limited transit alternatives. 

Considerations of Insurance-Related Finance

Economic

  • Insurance-based approaches to financing are useful even from a purely economic perspective and, as a result, are gaining more attention from insurance companies and other entities and individuals not otherwise interested in climate-related resilience efforts.

Environmental

  • Opportunities exist to support activities that provide significant environmental benefits, (e.g., mass transit)

Social/Equity

  • Given the vulnerable situations many frontline communities face, e.g., living in flood zones, older housing, etc., opportunities to take measures to avoid insurance losses are significant, useful for insurance companies, and promising for insurance-related approaches to financing for these communities.
  • Attention should be paid to renters to make sure rent increases related to retrofits do not displace them.

Administrative

  • Given the various parties that must be involved in this approach, it can be useful to work through an organization, such as MyStrongHome, that has developed relationships with insurance companies, built expertise in understanding risk-reduction solutions, and streamlined its processes.

Legal

  • As this approach gains currency, legal structures for working with insurance companies on this approach are becoming more available.

Lessons Learned

  • The ‘win-win’ provided by insurance-based solutions should compel greater efforts to partner with insurance companies.
  • Advancing resiliency measures that support a given group (e.g., a flood protection wall for a neighborhood) will require community-building efforts, outreach, and possibly agreement to use the same insurance company (e.g., for flood insurance protection).

 

Related Resources

 
My Strong Home - Home Risk Mitigation Loans

MyStrongHome is a public-benefit corporation that helps individuals in coastal areas in South Carolina, Florida, Alabama, Mississippi, and Louisiana upgrade their homes, particularly their roofs, to be better protected from extreme weather. It makes the upgrades affordable by reducing individual insurance premium payments; it secures commitments from insurance companies to reduce these premiums in exchange for home retrofits that reduce risks for these companies. My Strong Home provides an “end-to-end” solution, from assessment and financing through construction and insurance. It assesses homes to identify ways homes can be retrofitted to meet FORTIFIED standards (stronger construction standards intended to improve building resilience to severe weather), offers unsecured loans to homeowners to finance home improvements costs, selects certified contractors, manages construction, and, finally, helps to arrange new discounted home insurance. Rather than paying for the construction costs upfront, homeowners pay back the construction loan with the money saved on insurance. In one example, the cost of upgrading the roof of a home in New Orleans was $8,985, but the homeowner was required to pay only $875 upfront. His insurance premium was reduced by $1,376 annually, and he used these savings to pay off the loan he secured for the upgrade.

  Bonds and Bank Loans Tax Credits, Tax Increment Financing & Land Value Capture