Prospects for Massive Federal Disaster Assistance

After Hawaii’s Next Catastrophic Event

Michael P. Hamnett, Ph.D. and Kristine G. Davidson Oh

Social Science Research Institute, University of Hawaii

Hurricanes in Hawaii:  What are the risks of damage?  What can home owners do to reduce their risks?

Table 1 Hurricane Iniki Federal Assistance

Table 2 Federal Disaster Assistance:  Estimates for a Direct Strike on Oahu from an Iniki-Strength Storm (1992 dollars)

Appendix 1

Appendix 2

December 1996

ABSTRACT: This paper provides an analysis of the federal government’s ability to help Hawaii cope with losses from a catastrophic hurricane and the lack of adequate hurricane insurance coverage. It begins with a discussion of the assumptions underlying the establishment of the Hawaii Hurricane Relief Fund. A review of post-Iniki federal disaster assistance follows. Next, this paper estimates the amount of assistance required had Iniki struck Oahu. The paper then examines changes in attitudes and programs within the Federal Emergency Management Agency that could affect future disaster assistance. This is followed by a review of legislation introduced into the 104^th Congress designed to help Hawaii deal with the lack of affordable hurricane insurance and reinsurance. The concluding section discusses the need for the state and county governments to take steps to reduce the risk of future disaster losses.

 

Background

In December 1993, the University of Hawaii’s Social Science Research Institute (SSRI) recommended that the state government provide public information on the risks of natural disasters, what can be done to reduce these risks, and provide incentives for disaster mitigation. The following year, SSRI was awarded a contract by the Hawaii Coastal Zone Management Program to facilitate the implementation of those recommendations. For almost two years, SSRI staff and consultants worked with state and county agencies, private insurance, construction, and banking industries, members of the state legislature, and private citizens to encourage the development of disaster mitigation programs and activities.

There was considerable interest in disaster mitigation in the year following Hurricane Iniki. The insurance crisis that followed the storm served to keep this interest high. The establishment of the Hawaii Hurricane Relief Fund (HHRF) provided what many people believed to be a "temporary" solution to the insurance crisis. After almost three years of operation, it has become increasingly clear that the HHRF will remain the primary source of hurricane insurance coverage for Hawaii’s homeowners. Unfortunately, HHRF does not have the capacity to cover hurricane losses in excess of about $1.3 billion.

According to individuals involved in establishing the Hawaii Hurricane Relief Fund (HHRF), there were three underlying assumptions held by the legislators and elected officials primarily responsible for developing the enabling legislation. First, they could not design an insurance program to completely cover property losses from a catastrophic hurricane hitting the island of Oahu – adequate reinsurance to cover such a loss could not be purchased at a price that would make premiums affordable. The second assumption was that eventually private insurers would re-enter the hurricane insurance market and HHRF would cease to be the primary source of hurricane insurance. The third assumption was that if Oahu suffered a catastrophic loss, "the feds would have to step in."

Some of those involved in the establishment of the Hawaii Hurricane Relief Fund (HHRF) were also hoping that the U.S. Congress would pass legislation to provide either primary catastrophic disaster coverage, reinsurance for catastrophic disaster coverage, or both. Indeed, Senator Inouye and Congresswoman Mink were co-authors of bills introduced into the 103^rd Congress to provide such coverage. These bills (S. 1350 and H.R. 935) were being debated while the state legislature was in the process of establishing the HHRF. However, neither bill made it out of committee. Senator Inouye joined Senator Stevens of Alaska in introducing the Natural Disaster Protection and Insurance Act (S. 1043) to the 104^th Congress. In its original form, this bill and its companion bill in the House of Representatives (H.R. 1856), would have created a private corporation to provide reinsurance for catastrophic disaster losses. Passage of these bills could have either encouraged private carriers to re-enter the hurricane insurance market in Hawaii or provided the level of reinsurance the HHRF would need to cover a catastrophic loss on the island of Oahu. They would have also established a mitigation fund to support the implementation of mitigation activities recommended in the Social Science Research Institute’s December 1993 (Phase I) report.

Federal Disaster Assistance After Iniki

As already indicated, the framers of the legislation establishing the Hawaii Hurricane Relief Fund assumed that if Hawaii suffered a catastrophic loss more costly than Iniki, the "feds would have to step in" to help recoup losses. In order to assess what might be available in the future, it may be useful to review the disaster assistance supplied following Hurricane Iniki in 1992 and the statutory limitations of the programs used to provide them.

The federal government paid nearly $637 million in disaster assistance costs in Hawaii following Hurricane Iniki, not counting direct Federal Emergency Management Agency expenditures (Table 1). These funds were granted or loaned to individuals, state and county agencies, and private non-profit organizations. All of the funds provided by the federal government were issued through authorized disaster assistance programs which have specific eligibility requirements (Appendix 1). About 35% of the funds supplied were loans to individuals and businesses from the Small Business Administration and to the County of Kauai as a line of credit from the Federal Emergency Management Agency (FEMA). Over 23% were grants to state and county agencies for the repair and rebuilding of public facilities under FEMA’s Public Assistance Program. Roughly $34 million, or 5% of total federal disaster assistance, were grants by FEMA to individuals through the Disaster Housing Program and/or the Individual and Family Grant Program.

Table 1

Hurricane Iniki Federal Assistance

The programs through which grants and loans were made following Iniki have congressionally authorized eligibility and funding limits, and some have matching grant requirements (Appendix 2). Therefore, the potential for the "feds to step in" is very limited. Federal funds could not have been used to cover insurance losses exceeding $1.6 billion. Aside from Small Business Administration loans, the federal government could not be used to cover businesses losses, or, aside from a Federal Emergency Management Agency line of credit, to off-set losses in state and county revenues.

If Iniki had directly hit Oahu, the amount of federal disaster assistance would have been considerably higher than it was for Kauai and the Waianae Coast. Using a methodology developed for the 1993 Coastal Hazard Mitigation Planning Project, Table 2 inflates the Iniki losses to estimate the level of federal disaster assistance that would have been needed had Iniki struck the island of Oahu. An estimated $9.3 billion in federal funds would have been required for comparable relief and rehabilitation support if Iniki had hit Oahu in 1992.

Table 2

Federal Disaster Assistance:

Estimates for a Direct Strike on Oahu from an Iniki-Strength Storm (1992 dollars)

While not totally beyond the realm of possibility in 1992, this level of federal disaster assistance would have been the second most costly disaster in the history of federal disaster relief and rehabilitation. Federal disaster assistance following Hurricane Hugo in 1989 totaled $1.3 billion. Assistance for Hurricane Andrew in 1992 totaled an estimated $2 billion, and the 1994 Northridge earthquake resulted in an estimated $9.7 billion in federal grants and loans.

The attitude of federal officials toward large allocations of disaster assistance has changed as a result of Iniki, Andrew, the Northridge earthquake, and other presidentially declared disasters. Moreover, as already stated, the Federal Emergency Management Agency and other federal agencies can only provide the types of assistance that are authorized by statute. Therefore, it is unlikely that federal disaster assistance to Hawaii for a catastrophic disaster on Oahu would be comparable to the amount of funding provided following Hurricane Iniki.

Had Iniki made a direct strike on Oahu in 1992, it seems likely that a far more serious insurance crisis would have resulted. With over $1.6 billion in actual losses in 1992, one insurance carrier went bankrupt and 40,000 property insurance policies were not renewed or canceled. If Iniki had struck Oahu, insured losses could have exceeded $24 billion. Undoubtedly, far more insurance policies would have been canceled, and it seems highly likely that most companies would not have been able to cover insured losses. Homeowners may have been able to qualify for Federal Emergency Management Agency housing assistance, which averaged $3,666 per household following Iniki. They may have also qualified for the Individual Family Grant Program which provided an average of $2,276 per family. However, most homeowners and businesses would have had to turn to the Small Business Administration for loans to repair or reconstruct their buildings.

The insurance industry in Hawaii has changed since 1992, largely because of the insurance crisis precipitated by Iniki. The state legislature established the Hawaii Hurricane Relief Fund (HHRF) in 1993 which is now the primary source of hurricane insurance for homeowners. As of April 1996, the HHRF had 144,457 policies in force worth approximately $31.7 billion. With $300 million in reinsurance coverage, an industry assessment of $300 million, and a line of credit of $750 million, HHRF would be able to cover losses from an Iniki-strength storm striking Kauai in 1996. However, if an Iniki-strength storm strikes Oahu, HHRF will only be able cover about 51% of claims, and the only option for a federal bailout to rebuild homes under existing legislation would be Small Business Administration loans.

If Oahu homeowners borrowed from the U.S. Small Business Administration (SBA) at the same level as people did following Iniki, they would borrow over $3.1 billion with the average loan being $26,000. However, if they only receive $0.51 on an insured dollar from the Hawaii Hurricane Relief Fund (HHRF), the average SBA loan could increase to over $116,000 – which is forty-nine percent of the average HHRF policy for Oahu. Under this scenario, loans averaging $116,000 would be added to the existing debt burden of Oahu homeowners who lost their homes. These homeowners would still be obligated to pay off their existing mortgages and be required to pay additional monthly installments on their SBA loans.

The Shifting Emphasis within FEMA

Federal disaster assistance costs associated with Hurricanes Hugo, Andrew, and Iniki, the Northridge earthquake, and numerous less costly disasters have resulted in several initiatives by Congress and the Federal Emergency Management Agency (FEMA) to begin reducing the cost of federal disaster relief. In 1992, the Director of FEMA, James Lee Witt, began to shift the emphasis within FEMA toward disaster mitigation, arguing that the federal government cannot continue to bear the financial burden for increasingly costly disasters.

In 1994, the U.S. Congress and the White House embarked on efforts to balance the federal budget, and, under a balanced-budget agreement, supplemental appropriations for disaster assistance had to be offset by cuts in other programs. Legislation was introduced into the 103^rd and 104^th Congress to reduce the cost of disaster relief to the taxpayers. If the emphasis on mitigation within the Federal Emergency Management Agency continues, and Congress and the White House remain committed to reducing the cost of disaster relief, it seems likely that there will be a decrease in the amount of federal disaster assistance provided to states and increased pressure on states to develop and implement mitigation plans.

The National Mitigation Strategy. The most visible programmatic shift within the Federal Emergency Management Agency (FEMA) is the National Mitigation Strategy: Partnerships for Building Safer Communities released in August 1995. Citing the preventable loss of life and property from recent disasters and the prospect of even greater losses in the future, FEMA has introduced the "reinvention of FEMA, which established mitigation as the cornerstone of the Nation’s system of emergency management, marked a fundamental shift in disaster policy away from just reactive response and toward proactive pre- and post-event mitigation as well." The goal of the Strategy is, by the year 2010: To "substantially increase public awareness of natural hazard risk so that the public demands safer communities in which to live and work; and to significantly reduce the risk of loss of life, injuries, economic costs, and destruction of natural and cultural resources that result from natural hazards."

The proposed vehicles to sustain this transition to pre-disaster planning and proactive mitigation are financial incentives aimed either at the individual or their local community. The director of the Federal Emergency Management Agency (FEMA) has suggested an all hazards risk-reduction program using insurance as an incentive. Other options being discussed include tying hazard insurance rates to construction standards, tax rebates or credits for mitigation, and the establishment of all-hazard enterprise zones. In addition, FEMA has moved from a 50-50 match for mitigation activities to 75-25, thereby lowering the costs to local and state governments for hazard mitigation.

National Flood Insurance Program. Another signal of change came in 1994 with the signing of both the National Flood Insurance Reform Act and the Riegle Community Development and Regulatory Improvement Act. These acts formalized the pro-mitigation stance emerging from the Federal Emergency Management Agency, establishing programs for mitigation insurance coverage, grants for state and community flood mitigation activities, erosion hazard mitigation assessments, mortgage lending institutions compliance requirement for the purchase of flood insurance, and flood and erosion hazard mapping. This trend is also reflected by the implementation of the Community Rating System (CRS), which provides incentives to communities that institute mitigation measures beyond those required for participation in the National Flood Insurance Program.

Proposed Policy Changes in the U.S. Congress

Several bills have been introduced in the U.S. Congress since Iniki struck Hawaii to change the nature and scope of federal disaster assistance. The Community Development and Regulatory Improvement Act, passed in 1994, mandated changes in the National Flood Insurance Program to reduce federal spending on flood losses. The Natural Disaster Protection and Insurance Act, (S.1043) for which Senator Inouye was a co-sponsor, was introduced in the 104^th Congress. It and its companion bill in the House, the Natural Disaster Protection Partnership Act (H.R.1856), were intended to "…reduce reliance on disaster assistance from governments." Other bills were introduced to reorganize the Federal Emergency Management Agency and the disaster relief programs it administers. All these attempts to change the way the federal government deals with natural disasters have three consistent themes. First, they attempt to make the federal response to natural disasters more effective. Second, they are aimed at reducing losses; and third, they attempt to reduce the burden for disaster relief and rehabilitation on tax payers.

As previously mentioned, in its original form, S.1043 established federal catastrophic insurance and reinsurance programs that would have made reinsurance available to the Hawaii Hurricane Relief Fund. It also would have established a mitigation program to make more funds available for mitigation activities in Hawaii. Strong opposition to the original version of the bill came from members of Congress and public interest groups who saw this as a federal bailout for the insurance industry. Opponents also argued that the bill would increase the costs of disasters for the federal government. The bill went through several re-writes and both the insurance and the mitigation provisions that would have benefited Hawaii the most were eliminated despite efforts by Senator Inouye’s office to insure the bill met Hawaii’s needs.

The 23 May 1996 version of the Natural Disaster Protection and Insurance Act (S.1043), which did not pass, included provisions that would encourage states to adopt pre-disaster mitigation plans, funded by the federal reinsurance program and unspent post disaster relief funds authorized by Section 404 of the Stafford Act. The May 23^rd version would have enhanced the enforcement of flood performance standards under the National Flood Insurance Program (NFIP). And, the National Academy of Science (NAS) would have been required to develop performance guidelines for the operation of critical facilities after a disaster, as well as methods of disseminating disaster technology research.

The May 23^rd version called for the formation of a National Commission on Catastrophe Risks and Insurance Loss Costs. This Commission would have helped state departments of insurance and insurance companies to better evaluate the potential costs of hurricanes and earthquakes. It would have also improved the availability of insurance by assuring that insurance pricing adequately reflected risk. In addition, the General Accounting Office (GAO) would have been required to examine the impact on the federal Treasury and potential benefits to the insurance marketplace of changes in the tax code to allow insurer to establish un-taxable reserves for future catastrophes.

The May 23^rd version required the U.S. Treasury to annually auction a limited number of disaster excess-of-loss contracts for disasters which cause $25-$50 billion in insured losses. These contracts would have been actuarially priced and expire after one year. The accumulated proceeds of the sales would have been used to cover payments due if contracts were redeemed in a mega-catastrophe. To supplement the Treasury program, the bill would have granted anti-trust immunity to a private natural disaster insurance corporation—but did not authorize its formation.

The 104^th Congress did not pass Natural Disaster Protection and Insurance Act (S.1043) or the Natural Disaster Protection Partnership Act (H.R.1856). Opponents argued against the bills because they felt the legislation

interfered with the "free market" insurance industry;

pre-empted states’ right to regulate insurance rates;

created another large federal bureaucracy;

subsidized people who live in high-risk areas by those who live in low-risk areas; and

made local building codes subject to federal mandates.

Senator Inouye’s staff has indicated that new legislation to reduce the cost of federal disaster assistance will be introduced in the 105^th Congress. It will undoubtedly also attempt to address the lack of catastrophic disaster insurance and the need for disaster mitigation. It will not, however, provide authorization for the "feds to step in" and bail Hawaii out of a catastrophic hurricane loss for Oahu.

Conclusions

Hawaii has experienced damage from five hurricanes since 1950, with Iniki being the most costly. Unfortunately, the limited number of hurricanes striking Hawaii makes it impossible to predict, with any degree of statistical significance, the chances on a storm like Iniki striking any of the Hawaiian Islands. Insurance industry analysts have estimated the probability of a hurricane strike or near miss somewhere in the state at around 9% per year, and for a "strong hit" at about 4.5%. Subjective estimates and simulation models have put the risk of a "strong" direct hit or near miss on Oahu at probabilities ranging from a little over 1% to 2.7% per year. Most meteorologists are not willing to estimate the probability of future hurricane disasters, but they agree that all of the islands in the state, including Oahu, could be hit by storms with sustained wind speeds ranging from those of Iwa (73 mph) to those of Hurricane Iniki (130 mph).

The establishment of the Hawaii Hurricane Relief Fund (HHRF) provided a stop-gap solution to the insurance crisis that followed Hurricane Iniki. The HHRF has, however, only solved part of the problem. The Hawaii Hurricane Relief Fund can cover insured losses for its policy holders resulting from an Iniki-strength storm on any of the neighbor islands. But, it will probably only be able to cover about 51% of HHRF insured losses from an Iniki-strength storm striking Oahu.

Policy makers involved in the establishment of the Hawaii Hurricane Relief Fund assumed that if Oahu were struck by a catastrophic hurricane the federal government would step in and help. However, it should be clear from the analysis in this paper that the help the federal government is authorized to provide is very limited. Moreover, the Federal Emergency Management Agency and the U.S. Congress are seeking ways to reduce the amount of federal disaster assistance available and to encourage disaster mitigation.

State and county agencies in Hawaii have initiated a number of hazard mitigation efforts in the past three years. These include: adoption of the 1991 Uniform Building Code by the county governments; the adoptions of a risk-based premium rates and premium credits for mitigation by the Hawaii Hurricane Relief Fund; development of the Hawaii Flood Management Plan by the Department of Land and Natural Resources; establishment of the Hazard Mitigation Forum by Hawaii State Civil Defense; Maui County’s participation in the National Flood Insurance Program’s Community Rating System; production of public information materials including Planning for the Inevitable by the Coastal Zone Management Program; and retrofitting hospitals and fire houses to mitigate earthquake and wind damage. All of these efforts will eventually reduce the risk of disaster damage. However, unless a broad-based mitigation effort is developed and implemented by state and county government agencies and the private sector, Hawaii will remain at risk from catastrophic hurricane losses.

Appendix 1

Federal Disaster Assistance