Lessons We Learn from Hurricane Harvey

flood insurance

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Wharton's Howard Kunreuther, Eric Orts and Robert Meyer discuss the fallout from Hurricane Harvey.

As millions of Americans begin dealing with the devastation from Hurricane Harvey, which hit the Houston area on August 25, millions more are bracing for the potential of a second powerful storm. Hurricane Irma, which reached Category 5 strength on Tuesday, could make landfall in Florida by the weekend and cause billions more in property damage on top of the havoc already wreaked by Harvey.

The storms are refocusing attention on the topics of preparedness, land-use regulations and catastrophic insurance. Wharton professors Howard Kunreuther and Robert Meyer, who are co-directors of the school’s Risk Management and Decision Processes Center, visited the Knowledge@Wharton show on SiriusXM channel 111 to talk about how this year’s active hurricane season can become a platform for change. They were joined by Wharton legal studies and business ethics professor Eric Orts, who is director of the Initiative for Global Environmental Leadership. The following are key points from the conversation.

Expect the best, but prepare for the worst.

Harvey’s biggest wrath has come from historic flooding measured in feet, not inches. The resulting property damage is in the billions. Yet it has been reported that only 15% of the property owners in the area hit by the storm have flood insurance. The professors said part of the problem is that most people believe it will never happen to them, so they don’t prepare.

“It’s one of these things where it’s very, very difficult for both individuals and organizations to get their heads around the extremely rare [event],” Meyer said. “You have a tendency to think either something’s going to happen, or it’s a risk we don’t have to worry about.”

Preparation requires action on the part of individuals, businesses and the government. It requires foresight, money and political will, the experts said.

“There is this problem of long-term planning, especially for high-consequence, low-probability events like this one,” Orts said.  “I think one of the main takeaways here is that you really have a role for government to play in these kinds of situations, and you have a positive role for regulation. If you look at Houston, it’s really an example of urban development that did not take into account questions of flood control and rational policies. Those kinds of policies are very important.”

Since Harvey, news reports have illuminated the inadequacies in Houston’s land-use regulations and infrastructure to deal with quagmires such as storm drainage. It’s a problem facing many cities in the United States and around the world. Kunreuther agreed that regulations are important, but he said the topic of climate change also needs to be part of the agenda.

“It’s getting the message across that we’ve got to do something now instead of waiting until the disaster occurs,” he said.

Disaster preparedness is a shared responsibility.

Finger-pointing and recrimination is common after any natural disaster. Pundits, politicians, the media and citizens all want someone to blame, and it’s easy to blame each other.

“There are a lot of cooks in the kitchen in terms of where the fault lies,” Meyer said. The average home buyer, for example, has no expertise in flooding and relies on a real estate agent to disclose whether a property is flood-prone. The real estate agent will say flooding has never happened in the area, the homeowner doesn’t get insurance, and eventually there is a problem.

“How do you fix that problem?” Meyer said. “One strategy would be to go through regulation and say we’re going to require this and require that, but that just pushes back against a lot of notion of individual freedom. Houston doesn’t believe in zoning, much less making people buy flood insurance.”

Orts pointed out that Texas is, in a sense, too big to fail. Now, the federal government has to spend billions to bail out the state from Harvey’s floodwaters.

“When you look at the long-term planning, what you want to have is businesses and individuals be rational about if they’re going to build in a flood-prone area or a high-risk coastal area, then they buy the insurance to cover it,” he said. “That means if you have requirements to buy insurance, then the private market is handling the risk and you don’t have it all hitting taxpayers when you have a big disaster. That is a problem that we’ve had for many years now. Especially with another hurricane about to hit, maybe a rational reassessment of the policies that we have could come into effect.”

Kunreuther said a key issue is defining what roles the public and private sectors play in flood insurance, which is currently only provided by the federal government.

“There are now movements … into the private sector, and everyone is in favor of the private sector on one level. Certainly, all of us at Wharton would like to see private-sector involved as a part of our mantra,” he noted. “But at the same time, we recognize that there are a whole set of other issues that may require the public sector.”

Meyer said property owners must bear some of the burden by educating themselves and asking the right questions.

“At the end of the day, it’s ultimately an individual decision about where to live,” he said. “It’s really dangerous for individuals to assume the government’s going to fix it all.”

Kunreuther agreed but said there are a lot of disincentives to providing information.

“We have to find ways to not only let people know what the risk is, but we also may have to find ways to have appropriate regulations where a lot of other people might be hurt by virtue of this,” he said. “I think this is one of the challenges that we face in the renewal of the [flood insurance] program. When do we regulate? When do we let in individual freedom?”

“I think one of the main takeaways here is that you really have a role for government to play in these kinds of situations, and you have a positive role for regulation.” –Eric Orts

The time for change is now.

The National Flood Insurance Program is set to expire on September 30, and its timing with this powerful hurricane season could been seen as fortuitous. It gives policymakers a chance to explore what needs to change and how.

“We’ve got to begin to reflect on these longer-term issues in terms of taking advantage on the positive side of every disaster,” Kunreuther said. “We have a lot of history on disasters that people always come to the rescue right after, then we forget quickly.”

In their book, The Ostrich Paradox: Why We Underprepare for Disasters, Kunreuther and Meyer wrote about how the lack of planning carries heavy consequences. “What tends to decay very rapidly over time is emotional memory,” Meyer said.

Orts added that any catastrophe typically tends to “focus the mind” and generate short-term forward momentum. But there is often little long-term will, so that momentum slows to a stop.

“A lot of people — including academics, policymakers, etc. — are saying, here’s a rational policy to have. But you need to have the political will to push that forward.”

Kunreuther said he hopes Congress will delay action on the flood program for a few months so meaningful work can be done on creating a better program. He noted three issues that have to be incorporated into a cogent disaster-preparedness policy are climate change, loss mitigation and affordability.

“There are low-income people who are in these areas,” he said. “If you just let the private sector take over, you are going to have an enormous problem of people who say, ‘I can’t pay the $20,000 that I’m going to have to pay for my insurance policy.’ We have to put that on the table.”

Image: By SC National Guard – 170831-Z-AH923-081, Public Domain, https://commons.wikimedia.org/w/index.php?curid=62096178

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