Thirty-five catastrophic hurricanes have caused more than $341 billion (in real 2021 dollars) of insured losses along the east coast and gulf coast of the United States since 1999.1 During the same period, coastal property homeowners’ insurance rates in the U.S have increased substantially. Nonetheless, population growth in coastal areas has consistently outpaced that of inland areas, resulting in skyrocketing property value that is exposed to hurricane risk. Large value at high risk caused a decrease in the availability and affordability of property and casualty insurance. For example, the insurance premium for a house in Gulf Shores, Alabama (the city in our sample that is closest to the coast) is 3.15 times greater than that of an identical house in Huntsville, Alabama (the major city in Alabama furthest from the coast). For houses at the coast, the wind portion of insurance premiums is about 80% of total premium.2
Given the location of a house, the only way to decrease the probability and/or severity of a hurricane loss, and thereby reduce the insurance premium, is to install loss mitigation features. Toward this end, the Insurance Institute for Business and Home Safety (IBHS)3 offers the FORTIFIED Home™ (henceforth “Fortified”) program to promote construction of homes that are resilient to natural disasters. Fortified is a set of engineering and building standards designed to strengthen new and existing homes through system-specific building upgrades. The Fortified houses we consider in this study are built to mitigate wind and wind-driven water damage from hurricanes. In addition to promulgating construction standards, IBHS also trains contractors and evaluators to build and inspect houses to meet the standards. A trained and certified evaluator must inspect the house at several specific points in the building process for a house to receive the Fortified designation.
State law requires insurance companies in Alabama to give discounts for houses that earn the Fortified designation.4 There are three levels of Fortified designation: Bronze, Silver, and Gold. The differences in these levels are explained at the IBHS website.5 Table 1 presents benchmark discounts for each level prescribed by the Alabama Department of Insurance. These discounts only apply to the wind portion of a homeowner’s insurance premium. While insurers may offer larger discounts, they may not offer discounts smaller than the benchmark levels.