NEW YORK, September 25, 1998 — An insurance-industry initiative is giving communities incentives and insurers a new tool in this hurricane season to hold down property losses.
With the 1998 hurricane season now at its peak, and major storms threatening devastation along the U.S. coastline, attention is focused on efforts to help structures better withstand gale-force winds and torrential rain storms.
Building Code Effectiveness Grading, a program developed by Insurance Services Office, Inc. (ISO), evaluates the effectiveness of local building codes to help identify how well homes and commercial structures in a given community will hold up to hurricanes, earthquakes and other natural disasters. Insurers now use the building-code evaluations as a key variable in risk assessment.
Since the launch in Florida and the Carolinas in 1995, ISO's building code effectiveness evaluation program has been approved by insurance regulators in 42 states. The program is expected to be implemented in additional states during 1999, with the goal of having the program in all states by year-end 2000. So far, ISO has reviewed more than 3,800 building departments countrywide.
ISO's building-code program was developed in the aftermath of Hurricane Andrew in 1992, when it became clear that lack of adequate building-code enforcement contributed as much as one-fourth of the $16 billion in insured losses. Besides widespread suffering and economic disruption, Hurricane Andrew left 10 insurance companies insolvent and many others financially shaken.
Since Hurricane Andrew, which set the record for insured catastrophe losses, the insurance industry and leaders in emergency-preparedness management and construction have focused on the value of well-enforced, effective codes.
A recent study by the Federal Emergency Management Agency (FEMA) reveals striking evidence that structures built to code are much more likely to withstand hurricane-force wind damage. In examining habitable structures seaward of Florida's Coastal Construction Control Line following 1995's Hurricane Opal in Florida's panhandle, FEMA found that no structure that met Florida's rigorous storm-mitigation code was substantially damaged, while 56 percent of the structures in the same area that were not built to the tough Florida code were substantially damaged.
"The FEMA study confirms how important effective building-code enforcement is in reducing damage from major storms," said Patrick McLaughlin, senior vice president of ISO's Risk Decision Services unit, which evaluates municipal code enforcement for insurers.
"The building-code effectiveness grading concept is simple," said McLaughlin. "Municipalities with effective codes that are well-enforced should demonstrate better loss experience, and insurance premiums can reflect that." In communities with favorable grades, ISO's program provides for credits on personal and commercial property insurance premiums ranging from 1 to 17 percent for buildings constructed in the year ISO's evaluation is completed or later. The credits vary according to territories' proximity to bodies of water.
"The prospect of lower catastrophe-related damage and improved loss experience will be a powerful financial incentive for communities to enforce their building codes more rigorously, especially as those codes relate to windstorms and earthquakes," said McLaughlin.
ISO grades municipalities' code enforcement on a scale of 1 to 10, with one being best. ISO evaluates three broad categories of factors in code enforcement:
Greatest emphasis falls on the quality of code enforcement as it relates to natural hazards.
After the initial classifications, ISO will reevaluate municipal code-enforcement offices every five years, or sooner if they have significant changes in their code policies.
The building-code initiative is similar to ISO's program to evaluate the effectiveness of communities' fire-fighting capabilities, which has long been a factor used by insurers in determining rates for commercial property and homeowners insurance.
With 135 million U.S. residents now living near one of the nation's windstorm-prone coasts, and 95 percent of the U.S. population dwelling in seismically active areas, natural disaster losses will only escalate, McLaughlin noted.
"We can't control where people live. But we can encourage more effective enforcement of municipal building codes," said McLaughlin. "ISO's building code program provides that encouragement."