In April 2019, the Congressional Budget Office (CBO) released a report entitled: ‘Expected Cost of Damage from Hurricane Winds and Storm-Related Flooding’.  Because the CBO is an arm of the United States Congress, it does not state policies.  Instead, it presents policy options. This article discusses the report, the policy options and the relationship to Enterprise Risk Management (ERM).

Cost of Severe Weather Events
It is generally recognized that sever weather events are costly.  The CBO estimates that the cost of such events is $54 billion annually.  This is 0.3 percent of the nation’s current gross domestic product (GDP).  The costs by sectorial impact are:

1. Expected annual losses of $34 billion to the residential sector, including the costs of repairing homes and obtaining temporary housing.
2. Expected annual losses of $9 billion to the commercial sector, including the costs of repairing buildings and finding temporary space as well as revenue losses because of disruption to businesses.
3. Expected annual losses of $12 billion to the public sector, including damage to public property and spending on recovery activities, such as removing debris.

While these costs are substantive, they do not include all the costs resulting from severe weather events.

Social Costs Not Included in Estimate
The CBO in its cost estimate did not include the damage due to weather events such as blizzards, tornados, droughts, wildfires or similar weather-related events.  Nor do the figures include “nonmonetary losses, such as the emotional cost of losing a home”.

This is important because the 2018 wildfires in California cost the state $400 billion in total economic losses. This is the equivalent of 2% of the national GDP.  In addition, a study of the impact of the 2011-12 flooding in Queensland Australia found that the increase in cardiovascular disease and the development of strokes cost about $430 million. The increase in family violence due to the stress of the flood cost $720 million.  Infrastructure repair costs were $450 million.

The important point of these numbers is that the CBO figures for the annual cost of severe weather events are low.  Further, the social costs often exceed the cost to repair the physical damage.

The social costs, particularly stress from the event, will be exacerbated by amount of damage not covered by insurance or federal disaster relief funds.

Insurance Coverage
The amount of disaster related compensation due from insurance companies will depend in large part upon the nature of the individual policies.  However, insurance compensation will not cover all the repair costs. For example, the National Flood Insurance Program (NFIP) covers 95% of residents. Claim payments cover 85% of the losses.  Whereas, federal disaster assistance covers only 20% of the loss for those without flood insurance.  Homeowners without insurance will bare the heaviest financial burden.

On the commercial side, the CBO estimates that private insurance covers only 40% of the damages. The NFIP would cover some of the damages.  The degree to which the company is fully compensated for weather related damage, will depend upon the private sector insurance policy.

The CBO does not discuss the cost to state and local governments.  However, it does list the costs to the federal government.

Federal Costs
The CBO estimates that damages due to hurricane winds and storm related flooding would cost the federal government an additional $17 billion annually.  This figure breaks down as follows:

1. $11 billion to address losses to the public sector (the estimated $12 billion in such losses, net required contributions by state and local governments.)
2. $4 billion to provide individual assistance to households.
3. $1 billion to cover administrative costs associated with providing federal disaster relief.
4. $1.4 billion to cover the NFIP claims shortfall.

These costs are ones that are not included in the regular budget appropriations. Thus, they represent an additional drain on federal resources.  To reduce this drain and mitigate the damage resulting from storm related events, the CBO listed five options for Congressional consideration. These are:

1. Limit green house gas emissions. This would reduce the projected rise in sea levels.  This in turn could reduce the severity of future floods.
2. Increase federal funding to assess flood risks. Up to date information about current and future flood risks could help people make better decisions about where to locate homes and businesses.
3. Expand purchase requirements for flood insurance and better align premiums with risks. This would increase the number of households with flood insurance coverage and improve the financial sustainability of the NFIP.
4. Expand the federal roles in risk mitigation. The federal government should spend more on pre-disaster activities that would reduce damage and encourage greater use of risk-reducing measure in new construction.
5. Increase the share of post disaster assistance paid for by state and local governments. By increasing the share state and local governments pay for post disaster recovery, there is greater incentive for them to discourage development in vulnerable areas, thereby lowering expected costs from future storms.

As noted earlier, these are only policy options.  However, they do contain several policy implications.

Policy Implications
The most obvious take away from the options is the desire to reduce the federal outlays for storm related damage.  This is to be done by reducing greenhouse gases and an increase in federal outlays for improved flood analysis and forecasting. There is also the need to ensure that NFIP remains solvent.  This is to be accomplished by increasing premium and requiring homeowner to have flood insurance.  The remaining two options signal a more general federal trend toward risk mitigation and ultimately an enterprise wide approach to risk management.

The general tone of the report and its emphasis on storm related costs is an indication, stated explicitly in option 5, that the federal government can no longer be depended upon to fund all disaster relief.  More of these costs are going to be pushed to the state and local level.  Along with shouldering more of the repair costs, is the expectation that both state and local governments will take more proactive risk mitigative actions. To encourage this proactive mitigation the federal government should increase expenditures for predisaster activities.

While this is simply a policy option, some of this is already happening. The Federal Emergency Management Agency is required to set aside money for mitigative actions and resilience improvements. In addition, the National Institute of Standards and Technology, in its cybersecurity guide for the private sector and local and state government stresses Enterprise Risk Management (ERM).  Its guide is designed to be plugged directly into the organization’s ERM process.

The CBO’s policy options add momentum to the risk management effort generally.  The risk management push downward will ultimately cause ERM implementation by state and local governments.

Here again, this is already happening.  The U.S. Congress has mandated that state departments of transportation implement a Risk Based Asset Management Plan (RBAMP). The guide the Federal Highway Administration provided for RBAMP implementation is an ERM approach.

To date, in the United States, the push for ERM has not filtered down to the local government level.  This will likely change as Congress implements the policy options identified by the CBO.

Biography:

James J. Kline is a Senior Member of ASQ, a Six Sigma Green Belt, a Manager of Quality/Organizational Excellence and a Certified Enterprise Risk Manager(R).  He has work for federal, state and local government. He has over ten year’s supervisory and managerial experience in both the public and private sector.  He has consulted on economic, quality and workforce development issues for state and local governments.  He has authored numerous articles on quality in government and risk analysis. jeffreyk12011@live.com