Some of the world's leading insurance companies assembled in a room on Wall Street this fall to hear the opening pitch for a massive undertaking, constructing a chain of coastal barriers to defend the New York City region from future flooding.
The ambitious vision differs from the $14 billion system completed recently by the federal government to protect New Orleans from hurricanes that might mimic Katrina. The East Coast project, a potential network of walls, gates and dunes, would be financed largely by corporations.
Organizers envision that investors would earn a return through fees collected from residents, businesses and city governments that benefit from the project's "protective services." Their hope is that the insurance industry would be among the investors, having collected $4.6 trillion in premiums worldwide last year.
Insurers would have another incentive to see the system built: It stands to lower their exposure to climbing disaster losses as sea levels go up, organizers said in interviews. Seven companies attended the private meeting Sept. 25 at the Louis Berger Group, an engineering firm that designs public infrastructure projects. Among the participants were industry giants Swiss Re and Zurich.
"The main part of the discussion was if you're going to build a flood barrier, for example, either on the tip of Manhattan or maybe even from Sandy Hook, N.J., over to the Rockaways [in Queens] to protect the entire New York Harbor from surge, who's going to benefit from that?" said Tom Lewis, a vice president with the Berger Group.
"Some of the biggest beneficiaries include the insurance industry because the amount of claims they would have to pay would go down. Significantly."
Lewis added, "OK, well, if they're going to benefit from it, why can't they contribute to building that barrier?" He recalled that insurers were asked, "What do you think, guys, does this have legs?"
Lewis and other organizers said industry representatives seemed open to the idea: No one said no, but no one committed to it, either. Several insurance officials familiar with the proposal expressed more caution. The industry invests a huge amount of money each year, but it's often in predictable bonds and more liquid investments -- in part to make that cash available during a disaster.
"To put direct cash in is very different," said one executive. "There's no mechanism that I know of to ask for that."
Future cash concerns
The concept introduces an uncommon way to pay for national-scale projects that are meant to fortify the country's densest and most exposed coastlines as climate-related risks rise and federal funding falters.
Rather than having to adhere to federal standards that often neglect to consider the future effects that warming could have on flooding, a privately led project could be built to anticipate greater threats, said Wendi Goldsmith, founder of the Center for Urban Watershed Renewal and one of the plan's originators.
"That's the reason to do this, frankly," she said. "Congress does not have a clear, shared vision and interpretation of climate change and its ramifications."
Goldsmith was active in the New Orleans project, a string of concrete walls, earthen dunes and wetlands. It's a rare piece of public infrastructure that accounts for future damage from rising seas, intensifying rainfall and other effects attributed to climate change.
She believes it is rare in another way, too -- Congress is unlikely to fund another project of its size.
She said city officials are open to paying fees for the protection of fortresslike walls. In return, they could save money by responding to fewer disasters, repairing fewer bridges and sewers, and preserving buildings and roads, she said. A defensive system could also spur economic development by helping a city to get cheaper financing and lower insurance rates, Goldsmith said.
Still, some insurance experts question one of the group's main assertions -- that a barrier system would dramatically reduce disaster claims. In an industry filled with number-crunchers, it's not clear how an insurer could precisely account for those savings years in advance. It's even harder to determine whether those potential savings would provide a better financial return than traditional investments, some experts say.
"That seems very hard to do in a way that would ensure a return," said Eli Lehrer, president of the R Street Institute. "You don't know when a flood that you could avoid by building this infrastructure would happen. And there's probably no amount of infrastructure that could compensate for the worst-case scenario."
Despite the difficulties, Lehrer likes the idea of using private capital to build protective infrastructure. He noted that a "levy district" could be created in areas that benefit from the project, helping to shoulder the cost.
Gov. Christie's office also attended
For now, the group of organizers is focusing on the first step of the project. They're asking insurers and others to make contributions totaling $1 million. It would be used for a study to determine the financial exposure the region faces from catastrophes, and to determine what kind of barrier system the region needs.
So far, the Berger Group and the law firm Ballard Spahr have each chipped in $100,000.
Organizers want the project to be further-reaching than the series of gates and walls proposed by New York City Mayor Michael Bloomberg (I). They believe his plan, estimated to cost perhaps $20 billion, focuses too narrowly on protecting just New York City, rather than providing a regional defense.
No insurers have committed yet to fund the study. The companies that sent representatives to the September meeting include Ace Risk Management, Allstate Insurance, Chubb Corp., Lloyd's of London and Willis Group Holdings, a brokerage firm. Swiss Re and Zurich also attended, along with officials from the offices of Bloomberg and New Jersey Gov. Chris Christie (R), according to people familiar with the event. Officials from the New Jersey Department of Environmental Protection and the U.S. Army Corps of Engineers were also present, sources said.
One of the organizers asked ClimateWire to delay publishing this story, saying some insurers might not participate in the project if their identities are publicized.
One group appears to be leaning that way. David Smith, director of state affairs for ProtectingAmerica.org, an insurance-related advocacy group that sent a representative to the meeting, expressed support for the goal of reducing the impact of natural disasters. But he disagrees with how the organizers plan to do that.
ProtectingAmerica supports a national catastrophe fund, which would create a federal reinsurance program that's funded by premiums collected from participating states. Some of that funding could be used to strengthen communities from storm damage, he said.
"It's one thing to bring experts together to look at how could we prepare," Smith said. "Because we all know that prevention and mitigation saves money. It's a real good investment. That's the easy part. The hard part is financing the effort."
Visions of insuring the barriers, not building them
Others say the idea of using private funding is the way of the future.
Rick Geddes, an associate professor at Cornell University and an expert on public-private partnerships, sometimes called PPPs, said the financing concept proposed for the barrier system removes the financial risk from taxpayers. That increases the likelihood that the project would be built efficiently -- because private investors will protect their money. It also means that people who benefit from the infrastructure project will pay for it through fees, rather than the funding being provided by all taxpayers, he said.
The plan by Goldsmith and other organizers would use a mix of bonds and equity financing. The latter is a departure from insurers' normal way of doing business, industry officials said. It's riskier, and potentially more profitable.
"If the thing goes bankrupt, if the thing really goes belly up, all the standard rules of bankruptcy apply where the equity holders are the last in line to receive anything, after the government has received its taxes and wages have been paid and bond holders have been paid off," Geddes said. "You're truly taking a residual risk."
The organizers hope to hold a second meeting in January, this time with insurers who have pledged funding toward the preliminary $1 million goal. One insurance executive suggested it might be a smaller turnout.
He wondered whether insurers attended the first meeting out of a sense of competition -- not toward building a barrier system but rather to insure it.
"People might have been motivated [by], 'Oh, this is a $30 billion construction project. We need to be there to compete for the insurance that's related for that,'" the executive said. "That might be the most important thing the insurance industry could do -- is provide the insurance on the construction of this thing."
That could help attract investors, he said.