Insuring Public Buildings, Contents, Vehicles, and Equipment Against Disasters

Current Practices of State and Local Government and Options for Closing the Insurance Gap

by Lloyd Dixon, Jason Thomas Barnosky, Noreen Clancy

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Research Questions

  1. What insurance and financial risk management practices do state and local governments employ for buildings, contents, vehicles, and equipment (BCVE)?
  2. What role does Federal Emergency Management Agency assistance play in these decisions?
  3. What are options for closing the insurance gap for BCVE?

In the United States, federal, state, and local governments share responsibility for managing disaster risk. Whether the current allocation of risk between these different levels of government is appropriate is much debated. In the study reported here, the authors contributed to this debate by improving the understanding of state and local financial risk management practices and the role that the Federal Emergency Management Agency's (FEMA's) Public Assistance (PA) program plays in these decisions. They found that a significant portion of state and local governments that are eligible for PA purchase some type of insurance for their buildings, contents, vehicles, and equipment (BCVE) but that the insurance share across all PA projects is low, meaning that FEMA is paying for a substantial portion of the repairs. However, the insurance share varies by the attributes of the incident causing the damage and of the public entity. Regarding the role that the PA program plays in these decisions, the predominant view of experts consulted for the study was that the potential for FEMA assistance reduces state and local governments' purchase of insurance. Finally, this report discusses several approaches for increasing insurance coverage for state and local governments and the trade-offs associated with them. These approaches include encouraging credit rating agencies to evaluate communities' financial preparedness for disasters; requiring communities to analyze their risks in order to increase their awareness of them; requiring communities to cover a substantial first layer of loss; and eliminating PA for BCVE.

Key Findings

  • A significant portion of state and local governments that are eligible for Public Assistance (PA) purchase some type of insurance for their buildings, contents, vehicles, and equipment (BCVE).

State and local governments' overall insurance share is low

  • The Federal Emergency Management Agency (FEMA) pays for a substantial portion of their repairs.
  • The insurance share varies by the attributes of the incident causing the damage and of the public entity. For example, the insurance share is lowest for flood and earthquake, and the insurance share for midsized communities is higher than for either smaller or larger ones.

The predominant view of experts consulted for the study was that the potential for FEMA assistance reduces insurance purchases by state and local government

  • For example, some entities buy only for facilities that they believe are critical to repair quickly and rely on FEMA to replace the rest. Others buy policies with lower limits or deductibles than they would otherwise. Responses were diverse, however, and some experts saw no evidence that the PA program affected the decisions of some entities.
  • There are numerous approaches to increasing state and local governments' insurance coverage, and each approach has trade-offs. These approaches include encouraging credit rating agencies to evaluate communities' financial preparedness for disasters, requiring communities to analyze their risks in order to increase their awareness of them, requiring communities to cover a substantial first layer of loss, and eliminating PA for BCVE.

Recommendation

  • Policymakers should consider the advantages and disadvantages of different approaches to increasing state and local governments' insurance coverage and consider how best to allocate risk between federal, state, and local governments.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Background

  • Chapter Three

    Insurance on Public Buildings, Contents, Vehicles, and Equipment

  • Chapter Four

    Drivers of Insurance Share for Buildings, Contents, Vehicles, and Equipment

  • Chapter Five

    The Role That FEMA Assistance Programs Play in State and Local Risk- Management Decisions

  • Chapter Six

    Options for Closing the Insurance Gap

  • Chapter Seven

    Conclusion

  • Appendix A

    Glossary

  • Appendix B

    Statistical Methodology

  • Appendix C

    Interviews

  • Appendix D

    Parametric Insurance

Research conducted by

This research was sponsored by U.S. Department of Homeland Security (DHS) Science and Technology Directorate and conducted within the Strategy, Policy and Operations Program of the Homeland Security Operational Analysis Center (HSOAC).

This report is part of the RAND Corporation research report series. RAND reports present research findings and objective analysis that address the challenges facing the public and private sectors. All RAND reports undergo rigorous peer review to ensure high standards for research quality and objectivity.

The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.