The climate change we’re now experiencing was forecast. Some believed the research and forecast reports, while others denied them … and some still do. One group that ignores the rhetoric and focuses on realities to maintain their businesses is the insurance industry. Here’s some reliable information coming from that industry. I’ll add suggestions afterwards.
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Climate change raising risks
of financial disaster for
homeowners, insurers and bankers
BY SAUL ELBEIN
The HILL
08/30/23
The rising weather-related risks from climate change, from coastal hurricanes to western wildfires, are increasingly pinching insurance companies, which are raising rates and pulling back from parts of the country in an effort to stay in business.
Just this summer, two major insurance companies left Florida, adding to the long list of companies that have left the state.
In July, Farmers Insurance announced it would no longer write policies in the state; in August, United Property and Casualty went bankrupt, leaving 22,000 of Floridians high and dry and all Florida residents having to foot the bill to bail it out.
Banks could be next, said Dennis Kelleher of public interest nonprofit Better Markets. Kelleher told The Hill …
“The banking crisis is only right
behind the climate and insurance
crisis. Every time an insurance com-
pany sounds an alarm, the banks
ought to be shaking in their boots,
because they’re getting the bill.”
Unprecedented disasters
The unprecedented hurricane cutting across the Florida Panhandle is just the latest in a string of billion-plus dollar disasters to hit the United States this year.
As of early August — before the fires that leveled Lahaina in Hawaii, and before hurricanes Hilary and Idalia — the U.S. had experienced 15 climate disasters with losses exceeding $1 billion, according to federal data.
Those disasters are becoming more frequent. In the 1980s, an average of almost three months separated such large-scale disasters — but for the last five years, they’ve been coming about every three weeks.
The backstop to these losses is the insurance industry, which has seen its costs increase exponentially in recent years. In 2021, the industry as a whole paid out nearly $4 billion more than it took in — and in 2022, following Hurricane Ian, those losses ballooned more than six times to nearly $27 billion, according to a review by a leading insurance trade group.
In the wake of these disasters, some insurance companies have left areas where the risk is highest, leaving an increasing numbers of Americans without insurance, according to The Wall Street Journal.
That’s a risk for banks since nearly two-thirds of U.S. homeowners are paying a mortgage to a lender — generally a bank.
Banks, in turn, use these homes as collateral in a dizzying array of loans and associated financial derivatives — all of which are based, Kelleher argued, on the increasingly obsolete assumption that the properties themselves are backed by insurance.
In the past, this largely made sense. Banks didn’t worry about losing the real estate the loans were written against — they worried about maintaining the tightest possible spread between the equity homeowners were paying in and the potential losses if they defaulted.
This assumption allowed banks to assume a loan-to-deposit ratio of 80 to 90 percent — meaning a bank may only have 10 cents or 20 cents in deposits or real assets for every dollar it’s lending out. Kelleher said …
That kind of ratio gives “very
little cushion, but at the end
of the day, it’s OK because you
have got the physical assets.”
But with the rise of climate change driven disasters, “the quality and reliability of the physical assets have dropped dramatically.”
Add the departure of insurance companies, he argued, and banks face the possibility of undergoing total losses for properties destroyed by disaster — losses that, in previous ages, insurance payments would have largely made up.
Kelleher argued that a wave of defaults is coming — one that will hit small community and regional banks first. He said …
“We’re not talking about a decade,
we’re talking over the next several
years of there being significant bank
and financial system consequences
for what the insurance companies
are experiencing right now.”
A lack of data
It’s unclear how many uninsured properties exist in the United States, which itself is a danger. Carly Fabian, a specialist in insurance and climate change at nonprofit Public Citizen, told The Hill …
“While you would think that
state insurance regulators
would have created such a
database and series of reports
through the National Association
of Insurance Commissioners, this
is unfortunately not the case.”
Regulators are struggling to catch up. The National Association of Insurance Commissioners in August announced it would build a comprehensive dataset to help identify where “insurance availability and affordability” is more challenging in the U.S.
That’s a move it had once opposed, Fabian noted, “which suggests they’re feeling pressure” to get more data on the problem.
Some progressive lawmakers want state insurers to focus on collecting data to figure out where the risks are worse. Rep. Sean Casten (D-Ill.) told The Hill …
“If you purchase a home in
Pensacola today, current sea
level rise projections through
2050 mean that your home will
likely be under water before
your mortgage is paid off.”
He added that as insurance firms catch on and stop writing policies in those areas, “a cascading effect” risks spreading through the financial system, as financial institutions offload loans, potentially threatening U.S. financial stability. Casten said …
“Congress and federal regula-
tors have an obligation to
do more to address this.”
Kelleher argued that financial regulators need to demand “stress tests” in which key banking regulators — the Federal Reserve, the Office of Comptroller of the Currency, and the Federal Deposit Insurance Corporation — require banks to audit their risk of failure in the face of different levels of serious climate upheaval.
Even where these tests are performed, it isn’t clear that banks are taking them seriously. In a stress test performed by the European Central Bank (ECB) that imagines a world in which global heating reaches 3 degrees Celsius by 2050 — three times its current level — banks assumed their total losses would be just $78 billion.
This number, the ECB itself noted, “significantly understates the actual climate-related risk.”
The role of fossil fuels
In the U.S., there’s an added issue: Both regulators and banks are taking heavy fire from the GOP and the broader fossil fuel industry, which is fighting hard to maintain a free flow of credit to the industry.
When the Federal Reserve last year announced it was opening an initial pilot project that would require six banks to audit their climate risk, Republicans cried foul, arguing this was the beginning of a move to defund fossil fuels.
Former Sen. Pat Toomey (R-Pa.), the then-ranking member of the Banking Committee, said in a statement in 2022 …
“The Fed’s new ‘pilot’ program is
the first step toward pressuring
banks into limiting loans to and
investments in traditional energy
companies and other disfavored
carbon-emitting sectors.
“There is no risk from global war-
ming that banks aren’t already
fully capable of pricing into their
decisions, and the Fed’s intrusion
into this process only underscores
that the real risk is government.”
Whether or not banks are capable, they are “light years” behind insurance, Kelleher said.
“Bankers are all tied up with,
you know, accusations of woke-
ness, and the power and influ-
ence of the oil and gas industry.
They should be more like the insur-
ance industry, which is, who cares
why a climate disaster is coming?
“The only thing they should care
about is, what the risks are, and
what they should do about the risks.”
But while their attitude toward reducing their direct exposure to climate change may be different, in one way, Fabian of Public Citizen noted, banking and insurance see eye to eye: Both are happy to keep investing in the very fossil fuels whose combustion makes the problem worse. She said …
“Even as they pull away from home-
owners, insurers like State Farm
remain major investors in fossil fuels
and others like AIG are both major
investors and major underwriters of
fossil fuel projects and companies.”
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When I read this sentence in the report …
In the 1980s, an average of almost three
months separated such large-scale disas-
ters — but for the last five years, they’ve
been coming about every three weeks.
I became convinced that all of us need to take steps to preserve our home ownership and way of life … and now, not in a few years. We may have to relocate if we’re in a high-risk area. Or we may need to make our homes safer from climate disasters, such as reinforcing the structure to withstand high winds, or installing a more reliable utility system, such as solar power … as the sun still shines throughout disasters.
Your only assurance of quality in your home comes from the building code. But the code serves as a bar for minimum compliance. Homebuilders are reticent to spend more than what’s required, as it cuts into profits.
When we built Garden Atriums, Hurricane Isabel struck our town. Something like 80% of the homes lost their roofs, and the town had no power for nearly a month. We didn’t have a leak in our roof, and always had power. Our metal roof and PV panels added slightly to our initial costs, but our monthly costs are far lower. And our peace of mind is higher. This reminds me of an article I just read. Paraphrasing …
A woman boarded a crowded bus. As she was standing, she asked a man seated in front of her if he might give his seat to a pregnant woman. He quickly did. Apologetically, he commented that she didn’t look pregnant. She replied …
“Well … it’s only been 15 minutes.”
We laugh when we’re in a good emotional space. Ads and articles focus on fear. “Sustainable Living” does mean (1) living 100% with what nature provides – which is actually not that difficult to do – and (2) enjoying a better quality-of-life experience. Joyfulness rather than fear. And we can do that, even in the face of increasing climate disasters. But … it’s up to each of us.
