PART II: This is part two in a two-part briefing on hurricanes. In
Part I, we deconstructed the drivers that put people and assets at risk and make hurricanes so expensive. Here in Part II, we outline the levers that present opportunities for private capital to reduce the impacts and costs of hurricanes.
Levers to reduce the costs of hurricanes
Hurricanes are becoming more destructive and expensive due to population growth in hurricane zones, incentives to continually rebuild in the same hurricane-prone areas, and vulnerable assets that are hiking up damage costs.
However, three key levers present an opportunity for private capital to reduce risk exposure and improve the resiliency of infrastructure and assets during hurricanes. These levers present a roadmap for private capital to reduce risk, reduce costs, and invest in resiliency.
- Reduce exposure by pricing in disaster risk.
- Fortify assets with hurricane resilient materials.
- Create public-private partnerships to fund hurricane mitigation efforts.
Lever #1: Reduce exposure by pricing in disaster risk
We are underestimating the financial risk exposure from a disaster. It’s a challenge to accurately price in the risk of disaster when evaluating where to make an investment or buy a home, and there’s evidence to suggest that we are underestimating the risk exposure from disasters. Research from 2023 found that U.S. residential properties are overvalued by $121 billion to $237 billion simply for current flood risks. Low-income households face the greatest risk of losing home equity through price deflation, but entire municipalities are at risk too: the research predicted that across the U.S., as property values decline, so too will property taxes, leading to possible budgetary shortfalls.
Insurance companies are leaving states. By definition, the price of an insurance premium is indicative of an asset’s underlying risk. The higher the cost of insurance, the greater the risk. In many instances, insurance companies pass on these higher costs to policyholders. But insurance companies are also leaving states like Florida and California altogether, or going bankrupt. Nine Florida-focused insurers have become insolvent since 2021.
For Hurricane Helene, insurance companies could be on the hook for as much as $75 billion in damage. In the commercial real estate market, premiums rose an average of 11% across the country last year, and as much as 50% in riskier markets like the Gulf Coast. For apartment buildings, insurance costs nationally have doubled in the last five years.
Insurance companies are canaries in the coal mine, and other private investors might follow how they’re pricing disaster risk. This can take different forms:
- Investing in climate resilient geographies (while avoiding or relocating away from hazardous ones): Insurance companies are reducing risk exposure by leaving disaster-prone markets. One firm, Climate Core Capital, invests in real estate assets with limited exposure to recurring climate risk. Their thesis is that “traditional real estate valuation methods don't capture climate risk, and markets are vulnerable to threats that are poorly understood by retail and institutional investors. A shift in risk calculus is underway.”
- Redirecting CapEx budgets to focus on capital improvements that reduce insurance costs: Facing the squeeze of higher insurance premiums and shrinking net operating income, commercial real estate investors are shifting CapEx expenditures towards resiliency improvements that reduce risk and could lower premiums. The renovations for one development in Boston reduced estimated flood loss risk from $10 million to $1 million, resulting in 10x cheaper annual flood insurance premiums.
- Applying a disaster risk lens to investments and acquisitions: Not all states have flood risk disclosure laws, and there is no federal law that requires transparency about an area’s flood risk. But increasingly, private data is available from groups like Realtor.com, First Street, ISeeChange and Climate Check. Such information is crucial for investors making informed decisions about where to invest.
Lever #2: Fortify assets with hurricane-resilient materials
For investors with assets in hurricane paths, fortifying assets or building ground-up development with resilient materials can reduce the risk of catastrophic losses (while also potentially lowering insurance premiums).
Fortifying assets saves money. First, the good news. Buildings in Florida that adhered to strict building standards that prized resilience led to a significant reduction in hurricane damage, according to a study by the reinsurer Swiss Re. Such building standards required homes to be built with materials that were more resilient to hurricane-force winds like fortified roofs with reinforced tiles and durable, laminated glass.
The most resilient houses and buildings can withstand serious storms and represent a blueprint for developers and investors looking to continue investing in geographies facing recurring hurricanes. One new ground-up development, Hunters Point, in Cortez, Florida (just south of Tampa) was designed to withstand a Category 5 hurricane. At a time when many insurance companies are fleeing the state, homeowners at Hunters Point are finding insurance companies willing to underwrite. It’s a bright spot in how private capital can invest in resiliency.
Even without resilience built into the initial design, there are opportunities for fortification. Tampa General Hospital was able to withstand two recent hurricanes by using Aquafence, a reusable 10-ft flood barrier that is constructed ahead of emergencies to withstand storm surges of up to 15-ft. With an initial capital investment of $1M, Tampa General has likely prevented millions of dollars in asset damages, not to mention bolstering capabilities of ongoing patient care during disaster events.
Greater asset exposure due to population growth wipes out savings from fortifying assets. So here’s the bad news: the losses due to population growth in Florida far outstripped the savings of fortifying existing assets with hurricane-resilient materials. Since the 1970s, Florida has grown to more than 23 million people. According to Swiss Re’s data, the growth in annual expected losses due to population growth was double the savings that improvements for better construction generated. In other words, if Hurricane Ian had struck Florida in the 1970s, it would have caused half or a third as much damage as it did in 2022.
The lesson is sobering: fortifying assets with more resilient materials matters less than the influx of millions of people into the path of disasters.
However, that doesn’t mean fortifying assets is not worthwhile. While there’s renewed interest in managed retreat in the wake of major hurricanes in 2024, there are numerous opportunities for the private sector to fortify communities in harm’s way, ranging from new ground-up developments like Hunters Point to investing in businesses, materials, and technology that fortify existing buildings and structures with hurricane-resilient materials.
Lever #3: Create public-private partnerships to fund hurricane mitigation efforts
Creative public-private partnerships, aimed at financing community-scale hurricane resiliency, are another area where private capital can partner with public dollars to strengthen a community’s ability to withstand a severe storm. FEMA has developed an entire Public-Private Partnership framework that outlines how public agencies can partner with private-sector actors to address a wide range of disasters.
Public and private actors can work together to strengthen resiliency efforts. For example, Florida’s Department of Economic Development and its Division of Emergency Management have outlined opportunities to take advantage of private sector resources, supply chains, and expertise. The state has developed resources for the business community to partner with the state around emergencies. One example, the state’s new site FloridaDisasterBiz, offers ways to coordinate with the state’s emergency response operations and prepare for emergencies.
In Houston, Texas, the Mayor’s Office of Public Safety and Homeland Security created a regional Supply Chain Group to maintain supply chains and critical infrastructure during and after an emergency event like a hurricane. This group aligned representatives from infrastructure—including power, water, building supplies, telecommunications, transportation, and grocery stores—to coordinate efforts surrounding hurricanes and other emergencies. After Hurricane Harvey in 2017, the city expanded the Supply Chain Group. Today, it now includes the neighboring cities and five surrounding counties. It is one example of how public-private partnerships are anchoring the Resilient Houston master plan.
As federal dollars are allocated to rebuild infrastructure, the private sector can step in as a critical partner in innovation and construction. In the wake of Hurricane Helene, there’s been greater attention on how critical infrastructure—like roads and bridges—need to adapt to become more resilient. For example, the destruction of roads in North Carolina have led to considerations of new types of concrete that are more porous, enabling water to drain more effectively.
Conclusion
The destruction from recent storms has left enormous price tags for communities grappling with what comes next. New approaches are needed and the destruction from hurricanes creates opportunities for the private sector to show up with solutions and innovations that can lead to more resilient communities. There is no panacea, but private investors and capital allocators are not without power to shape their assets and their communities to be more resilient.