Living With Floods
When it comes to purchasing flood insurance, a once-in-a-lifetime flood can feel like a lifetime away. Mississippi River basin has always been prone to flooding, but as the rivers within the basin have been increasingly channelized and disconnected from the original floodplain, the risk of catastrophic flooding has steadily risen. It’s a problem that’s projected to become even more severe with impacts from climate change, which puts homeowners that live in flood prone areas at even greater risk, especially if they don’t have flood insurance.
In 2019, combined damages from flooding along the Missouri, Mississippi and Arkansas Rivers totaled $20 billion, almost half of all losses stemming from billion-dollar catastrophes in the United States, according to NOAA’s National Centers for Environmental Information.
Unfortunately, there is a vast divide between insured and uninsured losses. With Mississippi River flooding in 2019, reinsurance company Munich Re estimates that just $200 million of these losses were insured, putting the bulk of the burden on impacted citizens, businesses, communities, and governments. According to National Flood Insurance Program (NFIP) policy data, less than one percent of homeowners have flood insurance across the Midwestern states. Business properties are even less likely to be insured against flooding.
Events like the 2019 Mississippi River flooding are expected to increase in frequency and severity if climate change remains unchecked. With such a wide gulf between uninsured and insured losses, the economic vitality of inland communities is at risk. From rural river towns to big cities, significant and repeated flood events can destroy wealth among the uninsured and depress growth for years, if not decades, as the community recovers. In severe cases where recovery isn’t possible, relocation is yet another possible financial burden on the uninsured.
The Nature Conservancy partnered with Munich Re, the German multinational reinsurance company, to study potential benefits of combining nature-based flood mitigation with a community-based flood insurance product. “Everybody who benefits can play a role in creating greater flood resiliency,” says Viv Bennett, TNC’s Director of Protection and Conservation Strategies. “That includes the community, environmental organizations like TNC, and the insurance industry.”
A First-of-Its-Kind Study
The benefits of ecological restoration on insurance costs had been studied in areas that experience coastal flooding or wildfires, but never for inland river flooding. With its study, TNC and Munich Re wanted to develop strategies for resilience on multiple fronts—upgrading infrastructure that reduces flood risks and empowering communities to recover when floods do happen.
If the potential for infrastructure damage is less, insurances losses would be less, and the insurance premiums would be lower. The study was designed to see what sort of savings could be generated by a project like a levee setback that expands the river channel, thereby reducing flood risk by giving water a place to go.
In August 2019, TNC and multiple partners set out to complete a large-scale levee setback project for the L536 levee along a segment of the Missouri River that had experienced flooding during unprecedented rainfall earlier in the year. The construction of the L536 Levee Setback levee was completed in July 2021 with completion of the rest of the project anticipated by January 2022. Through its insurance modeling, Munich Re found that the annual flood insurance premiums for structures within the areas benefitting directly from the project could be reduced by over 55% through the levee setback.
Moving a levee further inland from the river—a method known as a levee setback—widens the path for a river to flow, which reduces water velocity and water levels, thereby reducing the probability of levee failure. In addition to flood protection, levee setbacks offer extensive ecological benefits by creating habitat and improving biodiversity and water quality.
As longstanding partners, Munich Re and TNC set out to quantify how the L536 setback project—and, by extension, other nature-based solutions—would reduce flood risk, and how insurance premiums could decrease over time. Munich Re utilized flood risk reduction modeling from the USACE, data and insights from various stakeholders as well as its own proprietary data, technology and analytics to measure the benefits of mitigation like reduced water levels and lower likelihood of catastrophic floods.
"The Nature Conservancy and Munich Re have demonstrated that a nature-based solution for river flooding can be accounted for in insurance modeling and pricing.“ says Dave Jones, TNC Director, Environmental Risk. "As we hoped, we found that a nature-based approach to reducing river flooding, which is good for the environment, also results in lower insurance costs.”
Creating a “Virtuous Circle”
Flood insurance can give people the financial means to recover from a devastating event. In some cases, the infusion of funds can even kickstart the process of helping the community prepare for future threats.
In many cases, homeowners do not fully understand the risks to their property and opt to forego a policy, particularly when the cost of a policy can be prohibitively high. As the risk of flooding increases, the cost of insurance policies for vulnerable homes, businesses and communities increases further. This not only sends prices spiraling upwards; in some cases, it may force insurers to exit a market. For most people living in a floodplain, the only option for flood insurance is the National Flood Insurance Program administered by the Federal Emergency Management Agency (FEMA).
Insurance works best when the risks can be spread across a broad base of individuals. This is where community flood resilience insurance comes in. It’s a new product that has not yet come to market but was included in TNC and Munich Re’s study because insurers are planning to bring it to market. Instead of insuring home by home, an insurance company would sell an insurance product to an entire community or subset of a community. The local government entity or homeowners’ association would purchase the insurance for the homes in the community. Such a community-based insurance product would account for nature-based resilience and help spread the risk over more homes, thereby lowering the proportionate cost per home.
The study compared the current NFIP premiums paid by homeowners to the premium for community flood resilience insurance that takes into account the risk reduction benefit of the levee setback.
This modeling showed that homeowners would save even more on flood insurance by covering themselves as a community with a single policy.
“This study shows that you can put nature at the forefront, and it can be coupled with a community insurance program,” says Jones. “You get better insurance pricing for the homes, and it gives you an opportunity to capture some of those savings to go toward risk reduction.”
The study also explored how insurance savings might be captured and used to fund the nature-based approaches to flood risk. Using the L536 project as an example, the study found that the insurance savings associated with the community flood resilience insurance and levee setback project would be sufficient to fund the costs of land acquisition associated with the L536 levee setback.
Combining a nature-based approach to reducing flood risk with insurance that accounts for that reduction in flood risk can reduce the cost of insurance. Some portion of that savings, if captured, can be used to fund the nature-based approach to reducing flood risk. In effect, the nature-based approach to reducing flood risk generates insurance savings which in turn can be applied to funding the nature-based approach to reducing flood risk.
“With a community-based insurance product that the local government purchases, there are savings that can be passed onto the homeowner,” Jones explains. “But the local government can also capture or retain some of those savings and put them toward the nature-based risk reduction. It creates a virtuous circle.”
After the Missouri River Community Flood Resilience Insurance project proved that a levee setback can significantly reduce flood risk and reduce the associated insurance cost with a community insurance program, TNC and Munich Re are eager to apply the approach to new landscapes and communities, further demonstrating how to capture and use those savings to fund flood mitigation projects.
This project has the potential to be replicated in riverside communities in the Midwest facing flood risk. Similar levee setbacks as well as other mitigation approaches throughout the region could strengthen overall resiliency along the Missouri River, throughout the Mississippi River Basin and beyond.
“We’ve demonstrated in a robust and thorough way how this would work,” says Jones. “The next step is to try to pilot it somewhere.” Such a pilot would pair a nature-based flood mitigation project like a levee setback with an actual community flood resilience insurance program, to put in to practice what the models show will reduce insurance costs. From there, TNC, Munich Re, and other partners would also develop mechanisms to capture the insurance savings to fund a portion of the underlying nature-based solution that’s reducing the risk.
“It means that a project like this is potentially self-funding,” Bennett says. “There can be an economic benefit that everyone can participate in. The good news is that nature wins too.”
This work was made possible, in part, by generous support from the Enterprise Rent-A-Car Foundation.