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By Leslie Kaufman
As the Trump
administration stalls federal funding for
projects intended to make states more resilient
to climate change and private insurers decline to
cover properties in high-risk zones, North
Carolina just proved there’s another way to fund
disaster preparedness: a $600
million catastrophe bond that rewards
homeowners and their insurer for installing
“super roofs.”
Along North
Carolina’s beaches, wind
damage from hurricanes is such a threat
that many private insurers have stopped offering
coverage. Hundreds of thousands of homeowners
have been forced to buy coverage from the North
Carolina Insurance Underwriting Association
(NCIUA), the state-created insurer of last
resort for coastal properties.
Like other
insurers, NCIUA has to buy its own risk
mitigation so it can pay customers if a major
event causes more damage than it has saved from
collecting and investing premiums. One option is
reinsurance and another is a
catastrophe bond, which pays out a
specific amount if damage reaches a particularly
severe level. Cat bonds have become popular with
institutional investors like hedge funds and
endowments in recent years because they trigger
rarely and otherwise deliver high returns.
A home with
a missing roof after Hurricane Dorian in
Beaufort, North Carolina, in 2019. Photographer:
Charles Mostoller/Bloomberg
For years,
academics and brokers have discussed whether cat
bonds could do more than just clean up after
disasters—whether they could incentivize
mitigation work that would lessen damages in the
first place. Earlier this year, NCIUA decided to
test it: They offered investors a cat bond with
two features linked to reducing wind damage
risks to homes in its portfolio.
First, if no major
losses occur each year, $2 million returns to
NCIUA—earmarked exclusively to incentivize
homeowners to install “super roofs” that are
especially wind-resistant. Second, as more
people add these roofs, the annual pricing on
the bond resets to reflect the changing
exposure.
It’s modest
financially but revolutionary conceptually, said
Shalini Vajjhala, founder and executive director
of PRE Collective, a San Diego-based nonprofit
that works with communities and government
agencies to clear barriers to building climate
resilient infrastructure.
“The North Carolina
program is game changing,” she said. “It’s a
precedent-setting way of linking how you manage
your financial risks with how you manage
physical risks.”
Super roofs
prevented damage, but since they exceed building
code requirements and cost roughly $3,400 more
than a standard roof, few homeowners installed
them.
So in 2017, NCIUA
began offering free super-roof replacements to
homeowners who needed a new roof after a storm.
They met resistance at first, said Gina Hardy,
chief executive officer of the association.
“With the free grants, people thought we were
running some kind of scam.”
So the association
engaged in consumer and contractor education.
They also expanded incentives. In 2019, NCIUA
offered $6,000 grants for super roofs during
routine re-roofing, even though the upgrade cost
just a fraction of that. They later increased it
to $10,000. Homeowners essentially use the rest
to defray regular roofing costs.
It was those new
grants that turned Marie Raynor, 59, from a
skeptic to a buyer. She’s lived in coastal North
Carolina her entire life, and in 2024 her home
in Wilmington, just a few miles from the beach,
had a leaking roof. She received a mailing
advertising the roof program, but worried it was
an empty sales pitch; a call to the insurance
office verified the program’s veracity.
Eight weeks after
she applied, she had a new roof. And now she is
“thrilled.” It was one of the most painless
renovations of her life, she says, and she is
convinced that the new construction is venting
wind and even heat in the summer.
“I feel like it is
also a rebate for all the years I paid insurance
and didn’t use it,” she said.
About two years
ago, the program began really catching on.
Today, more than 20,574 homes have these roofs
or are in the process of adding them and more
than 6,000 were added just this year. And the
financial benefits are already accruing.
After every storm,
NCIUA checks the results. They’ve found that
fortified homes had 60% fewer claims than
code-compliant homes during regular storms, and
20% to 30% fewer claims with lower severity
during named storms.
Read the full
story, including why the super roof
success may be hard to replicate for other
types of climate disasters. For access to all
our coverage of how the insurance industry is
evolving in a riskier climate, please subscribe
to Bloomberg News.
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