Nashville Floods in a Recession

When I worked in the reinsurance industry, “double-trigger” policies were the latest innovation for commercial policyholders. A powerful storm season concomitant with severe financial stress owing to a prolonged recession suggests a new market for this innovation. Double trigger policies offered more cost-effective coverage for linking uncorrelated risks. Consider an insurance company that covers policyholders in a seismically active area. It has sufficient capital reserves to pay expected claims from its own resources and so would prefer to forego more expensive reinsurance coverage to supplement its capital strength. But what if the earthquake occurs at a time when the value of the insurance company’s bond portfolio is impaired due to events in the financial markets? A double-trigger policy kicks in when two events, or triggers, occur: a defined financial event and an insurable peril. As these two risks are uncorrelated with one another, the premiums are lower than standard earthquake insurance alone. I wonder if such a product could be adapted for public insureds; certainly state and local governments are in need of assistance.

Consider that the flash floods caused by record levels of rainfall in Tennessee could not have come at a worse time. And they follow an unusually active storm season, such as the recent floods in Rhode Island, the worst in that state in the past two hundred years. At least 25 people have been killed in the southern states in thunderstorms, floods and possible tornadoes. Top Nashville tourism spots, such as the Grand Ole Opry and the Country Music Hall of Fame, are flooded. The news media have reported stories of local residents who are unemployed, lack funds for evacuation or temporary housing and could not pay for flood insurance. A disaster like this is doubly devastating when it occurs during a time of financial stress.