Hurricane Sandy and 2012's Other Natural Disasters Could Cost Homeowners for Years to Come


Mother Nature certainly made herself known in 2012, unleashing unusually destructive wildfires and storms across the U.S. Hurricane Sandy alone caused up to $50 billion in damage. While the spate of disasters weighs on homeowners in the near-term in the form of reconstruction costs, it may have significant long-term effects on homeowners and federal, state and local government.

2012's natural disasters could spur some homeowners and governments to take more precautionary measures to protect their properties against damage, experts say. And, though insurers may not want to admit it, their specter could nudge up insurance premiums.

Dr. Tom Jeffery, chief hazard scientist at analytics firm CoreLogic, says that this year's disasters are likely to persuade more city and state governments to hedge their bets against the possibility of severe weather.

"Homeowners really don't have any way to avoid having a hurricane occur, but certainly, as New Orleans has proven, you can build and develop mitigation measures," he said. "With the amount of damage that was done with Sandy, it does become cost-effective to start to consider those things."

Mitigation measures could include building levees in areas recently discovered to be flood-prone, artificial berms and pumping systems. Water-risk management experts already have called for the construction of a water barrier that could stave off potential storm-surge damage in New York City.

"Hurricane Sandy, just one year removed from the devastation in the Northeast from Hurricane Irene, demonstrated the importance of preparation for events that are possible, even though they may not have a high statistical probability," wrote Jeffery in "CoreLogic 2012 Natural Hazard Risk Summary and Analysis," a report released by CoreLogic on Thursday.

It's possible more homeowners may also take additional measures to protect their homes, and that buyers may steer clear of regions that are now known to be susceptible to disasters. But Jeffery says that history shows that disasters don't seem to affect buying or building activity as much as one might think.

"In the aftermath of hurricanes, there's an awful lot of damage," he said. "Yet it doesn't seem to deter anybody from wanting to build on the coast where they have a beautiful scenic view."

In the case of wildfires, which in 2012 caused the third-highest loss of acreage in more than 50 years, governments are likely to ramp up efforts to reduce flammable matter in fire-prone areas. And homeowners, wary of last year's damage, may be more inclined to adopt the practice, he added.

Reducing the amount of natural material that fuels wildfires is a change from previous strategy, which stressed fire prevention, he said. "We had Smokey the Bear syndrome," he said. "That's kind of gone by the wayside."

Insurance Premiums Could Rise

2012's natural disasters could also push flood insurance premiums higher. Premiums are set by the Federal Emergency Management Agency's National Flood Insurance Program -- the sole provider of primary flood insurance to homeowners. (Homeowners can also purchase additional "excess flood insurance" offered by private companies for damage that may exceed FEMA's coverage cap of $250,000 in building damage and $100,000 in personal property damage.)

Premiums on flood insurance for secondary homes already are set to rise because of recent legislation that eliminated subsidies provided by FEMA under the National Flood Insurance Program.

There's been a "recent push by the government to make the flood insurance program self-sustaining rather than heavily subsidized," said Burl Daniel, an insurance expert in Fort Worth, Texas.

A bill that passed Friday granting permission to FEMA, already reportedly $18 billion in debt, to borrow up to $9.7 billion to pay Hurricane Sandy claims may only increase calls for the NFIP to become self-sufficient. That could translate into higher premiums on the primary residences of many homeowners.

FEMA would not comment on the possibility of raising premiums, calling it a "longer-term" issue. But a spokesman did say that FEMA is attempting to spread word of "advisory base flood elevation" guidelines to homeowners in Sandy-impacted regions. Residents there would be well-advised to heed the guidelines, he said.

"If the Advisory Base Flood Elevation indicates a higher flood risk and a homeowner doesn't adequately elevate to mitigate that risk, when the flood maps are revised, they could face higher rates for being below the base flood elevation," he said.

Private insurers, which service FEMA's flood insurance for customers, could also alter premiums if it's discovered that premiums didn't properly reflect certain properties' flood risks, Daniel added.

To correct errors, they would have to raise insurance rates of some customers.

Homeowner's insurance premiums are even more likely to rise in areas hit by Hurricane Sandy, Daniel said. "The portion of the premium that goes to pay windstorm claims could rise over time," he said.

That's because the portion of premiums that cover wind-damage claims is determined using loss data usually spread over a 10-year period. In contrast, flood insurance premiums are based on the likelihood of flood damages over a 100-year period. Sandy's claims may have more of an impact on a 10-year average used to determine windstorm premiums than on a 100-year average used to calculate flood insurance premiums.

Allstate, a provider of homeowner's insurance, would not comment on whether it might raise homeowners insurance premiums in Sandy-affected areas. But it did say that "Allstate's prices need to reflect the costs of providing home insurance."