Drowning in Drought

Despite a 100-year increase in rainfall totals in the United States and normal to increased totals in Australia and Europe, we’ve got a drought problem.

The lack of available, usable water threatens the agriculture, manufacturing, hospitality, leisure and hydroelectric sectors. And much of that peril isn’t insured—or insurable. As a result, the real estate, banking and insurance sectors also face challenges.

Natural drought is being compounded by its man-made corollary: water mismanagement. Damming, diverting, wasting and contaminating water are all contributing to a growing problem in certain regions of the United States. And the problem promises to get worse over time.

At the end of May, despite epic rainfall in parts of the nation, most of the farming and much of the ranching and timber regions of the United States were under dryer than normal conditions, according to drought.gov. In the heartland, major portions are under severe, exceptional and extreme drought. The federal drought.gov website says about 34% of corn is under drought conditions, about 28% of cotton, and about 71% of sorghum. But why? Rainfall was average or well above average in about three fourths of the country through May, even in some areas listed as drought stricken, according to the National Oceanic and Atmospheric Administration (NOAA).

Man vs. Mother Nature

The main factors in water shortages center on public policy. We simply haven’t adjusted to new realities in building, agriculture and an ever-changing earthly climate, experts say.

For nearly a century, population centers have been built in areas not naturally suited for dense habitation. This includes the western deserts as well as southern wetlands in the United States.

To create and maintain cities in these areas, major changes to the terrain and waterways have been made based on immediate need more than long-term planning. Rivers have been dammed for hydroelectricity, deserts have been irrigated, and reservoirs have been built. Meanwhile, wetlands have been re-engineered to drain away both surface water and groundwater in order to create solid enough bedding for homes and businesses. For example, “Between 1780 and 1980, an estimated 60 million acres of wetlands in the Mississippi River Basin were drained,” according to the American Geosciences Institute (AGI).

The result of such rerouting of water is “decreased recharge into groundwater and increased flooding in the developed area,” the AGI says.

Places like Houston, New York City and the suburbs near New Orleans are emblematic of the flooding that results from the development of swamplands and marshes.

In response to the 2021 floods from Hurricane Ida, Gov. Kathy Hochul of New York said at a press conference, “I don’t ever want again to see Niagara Falls rushing down the stairs in the New York City subways.” Since then, the city has secured funding for planned infrastructure to absorb, store and transfer stormwater under its Cloudburst Program. It includes open spaces to store excess stormwater until drainage systems can process it, and construction is scheduled to begin in 2025.

Rerouting water has proven to generate myriad secondary issues. For example, it can cause already built subdivisions or business districts to become high-risk flood zones—even when they weren’t originally.

Additionally, rerouting tends to push rain into surface waters instead of letting it soak in to refill aquifers and feed deep root systems. If done without respect for the natural landscape, rerouting can deprive otherwise fertile areas of proper water flow or cause saltwater to push upward into reduced-volume riverbeds, harming marine and plant life.

Beyond the built environment, agricultural centers have been cultivated in areas not naturally suited for farming—or at least farming in the way it’s currently being done. For example, to support high-intensity crop cultivation, water for irrigation is pulled from aquifers—the water stored in underground, permeable rock—and land that would have absorbed rainfall to replenish the aquifers has been paved or is drained. A case in point: since 1901, the southeastern desert of California has been made fruitful by diverting the Colorado River.

By not retaining water and refilling aquifers, we are creating future problems, some of which are already becoming evident. When wells in California dried up in 2022, residents were forced to rely on bottled water. And aquifers across the nation, including the Ogallala, which sits under the Midwest corn belt, are being depleted. In fact, the Ogallala aquifer’s water levels in central and western Kansas fell by more than 12 inches from 2021 to 2022, according to the Kansas Geological Survey. In southwestern Kansas, the drop exceeded 25 inches.

The Business Repercussions

The depletion of aquifers, which is happening nationwide, threatens crops, livestock, farms in general and loans secured by land values. For instance, in the Ogallala case, Kansas Geological Survey says 80% to 90% of the water that’s pumped up is used to irrigate crops that won’t be sustainable if the water becomes too expensive to extract—a situation that already has occurred in some parts of western Kansas, according to a recent land value study done by Kansas State University.

The decrease in suitability of that land for farming and livestock has repercussions for lenders and agribusinesses alike. The Kansas State study projects a $34 million annual loss to the value of western Kansas land if the draining of the aquifer isn’t corrected.

“Lending in agriculture and manufacturing is based on historical revenue projections,” says Keith Schuler, president and CEO of InterWest Insurance Services. “If lack of water completely destroys future revenue, we can expect massive defaults. Talking with our banks in the ag space, they’re definitely concerned about that.”

The Immediate Consequences out West: Crops and Golf

Water shortages have hit California farmers hard. Many have implemented water-saving measures, such as drip and automated irrigation as well as water-smart soil strategies, saving about 33% in consumption over the past 20 years, according to Farm Together, a farmland investment company. But these technologies are expensive, and some farmers are simply leaving land fallow. Doing so restricts those farmers’ future insurability.

“We place a lot of crop insurance, but farmers in California are letting land go fallow because of drought,” Schuler says. “This affects their three- to five-year revenue,” meaning their insurable amount for future coverage is decreased.

Part of what is at issue is that crop insurance will pay for a failed crop or poor yield but it doesn’t cover revenue lost from not planting, according to Schuler. “Crop insurance is supposed to help in poor-yield years, not years you can’t plant,” he says. “Crop insurance ultimately isn’t a long-term solution for this problem.”

Beyond crops, golf courses are being forced to find drought-smart strategies or fold. Solutions include selective irrigation as well as new grasses that require less water. This is an important consideration for everyone living near or earning money from the golf industry in drought states. Arizona alone has more than 300 courses, and keeping them from turning into 150-acre patches of dust prevents the devaluation of neighboring communities. But golf courses tend to use a lot of water. Data from the Arizona Department of Water Resources shows that golf course water usage in the state has remained fairly steady since 2002, at around 125,000 acre-feet a year, with 30% to 50% of the state’s golf courses having exceeded their water allotments each year, according to a study done by The Arizona Republic. (One acre-foot of water would cover one acre of land in one foot of water. One acre-foot is about 325,851 gallons and is enough to meet the industrial and municipal demands of four people for a year.)

The pressure to reduce consumption is on, especially out West, for golf courses and the resort communities often affiliated with them. Creative—though costly—solutions are being tried. For instance, Pasatiempo, an Alister MacKenzie course in Santa Cruz, California, spent $9 million five years ago to install a wastewater treatment facility to reuse water from Scotts Valley that otherwise would be piped into the ocean. The golf club was required to get an industrial-user wastewater discharge permit, formulate an environmental plan, and follow all state and county water treatment laws, including the application of chemical disinfectants and the measurement of bacterial presence. The club’s liability exposure and equipment breakdown considerations, as you can imagine, increased dramatically.

Shipping and Other Worldwide Concerns

While water rights and drought in the western United States get a lot of press, low rivers and water shortages are affecting other regions as well. For example, record low levels on the Mississippi near Memphis last October created a cargo ship traffic jam, with a queue of more than 2,000 barges carrying corn and other grains from the heartland, according to the U.S. Coast Guard. So-called “flash droughts” have occurred on the Missouri and Ohio Rivers over the past few years as well. The Rhine, which serves most of Western Europe, the Yangtze in China and other rivers that support hydroelectric, shipping, manufacturing, farming and tourism have had loss of water flow in the past year, leading to disruptions in all of those sectors.

Shippers using depleted rivers have to substantially lighten their loads, hydropower firms have to cut back production, and all industries that use water for irrigation or input are affected. Additionally, as the volume of water declines, the ratio of pollutants to water increases, harming fish and animals that depend on the rivers. In general, drought and low river-water levels are a wide-ranging problem—both geographically and economically.

But water shortages, with the exception of crop insurance, are not a named peril in property and business interruption policies, according to a report by Zurich titled “Water Shortage Poses Global Risk to Businesses.” That means loss of revenue caused by water shortfall is unrecoverable.

Other follow-on problems of drought include wildfire and susceptibility of timber and crops to pests, says InterWest’s Schuler. Subsidence, damaged foundations, and sinkholes are all related to diminished water. Ironically, one of the main cascading perils of drought is flood. The land becomes hard and unreceptive to penetration of heavy rains, and drainage systems quickly become overwhelmed.

When It Rains…

Flooding has resulted in more than $70 billion in insurance payments over the past 50 years in the United States alone, according to FEMA.

“Flood is the number one natural disaster,” says John Dickson, president and CEO of Aon Edge. “There is no state that hasn’t been touched. And today’s weather is much different from yesterday’s weather. The maps haven’t kept up. We can do all the modeling we want, but we just don’t know where we’ll flood next. We need solutions. That includes land use practices, accessible financial vehicles that work, and improvements in flood mitigation and protections.”

Patty Templeton-Jones, president and chief program advocate at Wright National Flood Insurance Company, says, “We’re behind the eight-ball now. [The National Flood Insurance Program’s] Risk Rating 2.0 is intended to make people more aware of their risk, make rates better reflect the true risk. Raising rates may be the only deterrent” to continuing to build without taking the steps necessary to prevent flood destruction. “I went to Houston recently—the amount of construction, the amount of concrete!”

In response to the reality of flooding, many states have undertaken measures to channel water away from residential and business districts, pushing it largely into surface water receptacles, such as rivers, oceans and reservoirs. While doing this may seem to make sense, it appears to be fueling the very problem it seeks to cure. That’s because surface water evaporates and creates moisture in the sky that is subject to the jet stream and other atmospheric factors that affect where that precipitation will fall, how fast, and how much.

Carriers and brokers have a challenge when it comes to insuring against these risks. Modeling for massive rain events—predicting where the skies will dump their troughs of water so insurance portfolios can be better managed—is not very accurate for a handful of reasons, most having to do with the vagaries of Mother Nature, the effects of infrastructure changes, and the preconditioning of an area prior to a big rain event, such as a long drought, total saturation of the ground from prior precipitation, or deforestation from a recent fire.

“For example,” says Kieran Bhatia, vice president for climate change perils at Guy Carpenter, “look what Ian did last year. It was a predecessor that made the East Coast vulnerable to a significant impact from the minor Category 1 storm that followed.” He’s referring to the flooding that occurred in Florida, particularly the Daytona/Orlando corridor, when Cat 1 Nicole followed close on the heels of Cat 4 Ian. (Of note, almost all of Florida was under moderate drought or abnormally dry conditions as of the end of February, just five months after the inundation, according to USDA.)

While modelers understand the thermodynamics of storms, the effects of storms are less predictable in terms of losses. That’s partly because land use isn’t well mapped or incorporated into modeling frameworks. Land use includes the infrastructure and development of the area that receives the rain, such as dams, levees, drainage systems, flood plains, forest absorption, retention ponds—all the natural and man-made attributes of the earth that either allow water to seep into the ground, push rain into surface water or capture it for storage and future use.

“It’s not just about rerouting the water,” says Templeton-Jones, thinking in terms of solutions. “You have to have proper drainage.”

What Can Be Done

Protecting individuals and businesses from devastation through insurance is a baseline step. Though business interruption from water shortages isn’t covered, some of the perils related to drought are. Wildfire and flood are two lines of insurance that ought to be considered in light of the extremes in water risk.

For wildfire, California has taken regulatory steps to try to maintain insurance availability and counteract the loss of underwriting appetite. Insurance commissioner Ricardo Lara has issued mandates for wildfire insurers to prevent non-renewals for regions worst affected. “But that kicks the can down the road,” Schuler says. “Mandating traditional insurance is not the answer to the problems we’re facing. Carriers will just reposition themselves as soon as they can. The FAIR Plan is at risk because of the magnitude of the exposure. We are having to place DIC policies to pick up all the exclusions to protect our clients.”

“Commercial placements [for wildfire] are affected as well,” Schuler says. “Many clients are going bare because they can’t afford coverage.”

Getting affordable coverage for flooding is also a concern, says Dickson, from Aon Edge. “If you compare the people who are affected by flooding to the people insured for flood, the juxtaposition is shocking,” he says. “Flood insurance has to work for the businesses, homeowners, our communities and capital markets. That’s a challenge. The private market has broadened the field and allows consumers choices, such as business interruption and higher limits. Agents and consumers should look for flood insurance solutions that are done thoughtfully to benefit everybody.”

But insurance isn’t the only solution. More can be done in terms of water management, sources say.

Templeton-Jones points to Maricopa County, Arizona, as a model of how to do land use right to improve water control.

“I am amazed at Maricopa County,” she says. “It’s primarily a desert, but they have developed flood plains into recreational areas that can allow water to soak into the ground. They’ve made it beautiful. Those areas flood, but when the water soaks in, it’s great again.”

“We need to behave as if we’re in a drought even when we’re not,” Schuler says. That means conserving when using water, saving/storing water, and making smart decisions about population and commercial impact on specific areas. “We need to find ways to help create balance.”

He gives one example of what his brokerage is doing to build solutions.

“We were approached by a number of clients who are part of a group that is developing a new water district, the Tuscan Water District, to hold on to water they have rights to, water that they were losing,” Schuler says. The Tuscan Water District effort is a group of generational farmers and ranchers in the Butte and Vina sub-basins of California who want a more cohesive and impactful voice regarding use of groundwater, which is crucial to their tree-based crops, such as nuts. The water district, which is still going through the authorization process, would import surface water to reduce the demand on groundwater and recharge the aquifer.

“They asked us to financially support their efforts, and we did,” Schuler says. “Why wouldn’t we! The effect of water shortage on our community is very real. It is not a radical or political issue to improve our practices. We can all be more intentional.”