DAILY TRIFECTA: When Mother Nature Reappraises Real Estate
There are no climate deniers in the insurance business
TITLE: UNCOVERED: A HIDDEN CRISIS IN US HOUSING
https://www.bloomberg.com/features/2024-home-insurance-real-estate-crisis/
EXCERPT: It’s hard to overstate the role that insurance plays in the modern American economy. Banks won’t make mortgage loans for uninsurable properties; without those loans, the real estate market slows to a crawl, which in turn eats away household wealth and the tax revenue that state and local governments rely on.
For insurers to play their part, they have to feel confident predicting how much damage they might have to cover. To do that, they build models of the future based on what’s happened in the past. They don’t have to be right all the time, just enough to win more than they lose.
Climate change has made that much harder. A warming world is more dangerous and unpredictable. In the 1980s, the US experienced roughly three disasters a year that did at least $1 billion in damage. Now the annual occurrence is closer to 18, according to the National Oceanic and Atmospheric Administration, and likely to rise.
Private insurance companies are required by law to balance those risks with assets, typically a mix of plain vanilla investments, and hedges that include more complicated products like catastrophe bonds or reinsurance. They feed that stockpile with revenue from premiums. As the risks rise, so do the prices, sometimes to levels beyond what state regulators or policyholders will accept. When market conditions become too hostile, private insurers limit their exposure in a different way: They stop writing new policies.
When property owners see premiums skyrocketing or private insurers leaving, it’s one signal that the risks of disaster have grown beyond what the market will bear. Maybe it’s no longer safe to live—or at least, to invest significant wealth—in such places. Maybe it’s time to move.
That’s not a popular message for homeowners or their elected representatives, a group that includes, in 11 states, the insurance commissioner. Given the central role that insurance plays in the real estate market and, therefore, state revenue and population growth, politicians are tremendously motivated to keep insurance prices low, muting that market signal.
Florida, for example, was hit by eight hurricanes in 2004 and 2005. In his campaign for governor the next year, then-Republican Charlie Crist promised to freeze premiums charged by Citizens Property Insurance Corp., the state’s insurer of last resort. When he took office in 2007, he scuttled a 75% planned increase.
He set an important precedent. Florida, which has some of the riskiest assets in the US, has kept Citizens’ premiums at far less than the private market for storm insurance. Its policy count has almost tripled since 2018.
If Citizens faces a shortfall, it will allow insurance companies to levy a fee on every policy in the state. That means anyone with property insurance would be on the hook.
Historically, those assessments have been small, but that’s no guarantee. According to a 2018 study by the University of Cambridge and Munich Re, if a Category 5 hurricane hit Miami and the Florida coast, it could cause a staggering $1.35 trillion in damages, more than $60,000 for every person in the state.
Even a much smaller amount could stretch the means of the state’s significant retiree population, said Whitehouse, who leads the Senate Budget Committee. In November, he launched a probe into Citizens, asking for information about how it manages climate-related losses.
“The problem is that the numbers spin out of control once you look at them,” he said in an interview. “We’re afraid that’s a sign, that they know perfectly well that their numbers don’t add up and that they’re in deep, deep trouble. They just don’t want to admit it.”
Michael Peltier, a spokesperson for Citizens, referred Bloomberg Green to a letter the organization sent to Whitehouse in December, which says that it buys reinsurance and has ample reserves and financing options. It also noted that it can levy assessments on policyholders across the state and said its structure ensures it will always be able to pay its claims.
Whitehouse, though, is concerned that Citizens might need to appeal to the federal government for help, with Lehman Brothers-style arguments both for and against. “If Florida is the leading edge of the predicted coastal property values crash, it could lead to an economic meltdown similar to 2008,” he said.
TITLE: In Florida, Skyrocketing Insurance Rates Test Resolve of Homeowners in Risky Areas
https://insideclimatenews.org/news/06032024/florida-skyrocketing-insurance-rates/
EXCERPT: Across the country homeowners are grappling with skyrocketing insurance rates and dropped policies, with those in states such as California, Florida and Louisiana hit hardest. Growing evidence suggests the soaring costs only hint at the widespread unpriced risk facing homeowners as the warming climate leads to rising seas and more damaging hurricanes and wildfires.
As many as 6.8 million properties nationwide have been affected by insurance problems, but that number represents a fraction of the 39 million homes and businesses vulnerable to flooding, hurricanes and wildfires whose risk has not been priced into their policies, according to a study by the First Street Foundation, a nonprofit researching climate risk. Together these 39 million properties constitute what the study characterizes as an “insurance bubble,” defined by properties likely overvalued because of underpriced or subsidized insurance.
Other research suggests the changing climate has not been priced into the real estate market in a way that reflects the risk. A separate study published last year in Nature Climate Change, a peer-reviewed journal, estimates that residential properties vulnerable to flooding are overvalued by $121 billion to $237 billion, in part because of the subsidized National Flood Insurance Program.
The study found that the most overvalued properties are concentrated in coastal counties where there are no flood risk disclosure laws and where there is less personal concern about climate change. Much of the overvaluation is driven by properties situated outside of the 100-year flood zones designed by the Federal Emergency Management Agency. Low-income households especially are in danger of losing home equity, potentially leading to wider wealth gaps. In Florida properties are overvalued by more than $50 billion, according to the study.
The unpriced risk is important for many reasons. Municipalities that rely on property tax revenue may be vulnerable to potential shortfalls, the study says. The National Climate Assessment pointed out last year that the overvaluation of coastal properties makes it difficult to move people out of harm’s way, because of the limited amount of compensation available through flood insurance and federal flood disaster assistance programs.
“Florida is one of the riskiest places from a climate impact standpoint that you can live in,” said Rob Moore, director of the flooding solutions team at the Natural Resources Defense Council. “One only needs to look through a few years of front pages to see how many major hurricanes have struck this state, and that definitely had an impact on how both private insurers and insurers in the public realm are looking at risk and pricing it in the state of Florida.”
“We’re so far behind in regard to pricing in the climate. That’s why we’re seeing these big (insurance) spikes in places like Florida and California and Louisiana,” said Jeremy Porter, head of climate implications research at the First Street Foundation. “It’s the first mechanism to start to price climate into the housing market.”
TITLE: Texas Facing Fresh Insurance Crisis
https://www.newsweek.com/texas-facing-fresh-insurance-crisis-1876913
EXCERPT: The recent wildfire in Texas—the largest in the state's history—was not completely abnormal, experts said, and it's likely to become the norm in the future.
"According to NOAA's Billion Dollar Weather and Climate Disasters database, Texas is already being hit by more disasters than any other state: 170 since they began counting in 1980," climate scientist Katherine Hayhoe, a professor at Texas Tech University, told Newsweek.
"This is in part due to the state's geographic location on the Gulf of Mexico, spanning the humid subtropical conditions of Houston in the east to the arid High Plains of the Llano Estacado in the west," she said. "As a result of its geography, we get nearly every type of climate and weather disaster there is—hurricanes, heavy downpours, droughts, ice storms, blizzards, heatwaves and, of course, wildfires, too."
According to Bowen, the state is facing an increase of a phenomenon called "weather whiplash"—defined as experiencing rapid shifts in differing types of weather extremes in relatively short succession.
But the vulnerability to such destructive events is also due to the fact that Texas has the second-largest population and second-largest economy in the country. "So when you are measuring the impact of a disaster in terms of dollars, the more people, infrastructure, and industry you have, the higher the costs," Hayhoe said.
"A state like Texas that already experiences more disasters than any other would be disproportionately impacted as all of these disasters are super-charged by a changing climate," she added.
According to Bowen, academic research suggests that "a combination of warmer temperatures, lower humidity, drier ground conditions, and more flammable fuels will intensify fire behavior" in Texas in the future.