Insurers Are Deserting Homeowners as Climate Shocks Worsen
nytimes.com
nytimes.com
On the other hand many of the people living in these regions don't really have the means to move away and they're the ones disproportionately affected by all of this.
My interpretations would probably be some combination of
- information asymmetry leading to demand distorting upward
- the people who are buying the property have priced in the loss relative to their utility and will be relatively unaffected should they be left holding the watery bag
A million people a year get arrested in the US for drunk driving...and that's apparently the equilibrium. If that many people are willing to risk their lives and their freedom to save money on an Uber, it's not hard to believe that millions of people would be happy to buy beautiful waterfront property.
The risks are known but not totally apparent.
Even in large aggregates, investment decisions are ultimately made by people with their own biases. Markets are not infallible predictors of anything.
For that matter while some people are rich and flinging money at “expensive waterfront homes,” it seems like most of the people who are being nonrenewed here would have made their decisions before the risk environment shifted in these ways that their insurers are now moving to price in.
Forcing people out of their homes is always going to be painful and ugly; and it’s always going to be politically popular to “keep insurance rates down,” further blunting the raw, market-based risk signal in ways both blunt and subtle.
From a market-level view, that looks impure and improper. From a human, family-level point of view, it’s hard not to sympathize with people who feel like they did everything right, only to have their biggest asset, the totem of generational security that they worked their entire lives for, suddenly turn toxic.
Just as this Times article demonstrates, a lot of these folks don’t have a whole lot of attractive alternatives available to them by the time they’re in this situation. And this market, more than most, seems to come down to deeply human stories, and to images of sympathetic families paying the price for developers’ profligacy.
There are supposedly two climate-related threats from living on the coast: sea level rise and storm risk. Sea level rise is so trivial that many Pacific islands have been getting bigger, not smaller as was predicted, and it's a very steady rate of change. That leaves storm risk. NOAA is a group of people with a long history of scientific scandals who owe much of their funding to their claims about climate risk, but let's see what they say about living on the coast:
https://www.gfdl.noaa.gov/global-warming-and-hurricanes/
> "it is premature to conclude with high confidence that human-caused increases in greenhouse gases have caused a change in past Atlantic basin hurricane activity that is outside the range of natural variability"
Mankind has been emitting CO2 for 150+ years but there's no data showing it's made the weather worse.
So, all claims that living on the coast is a bad idea are based 100% on modelling predictions. Given they've been diverging over time and divergence has got worse instead of better, the opposite of what should be happening, reasonable people can certainly conclude it's OK to ignore them when considering property prices.
The problem is that the state mandates they use certain maps to assess risk, so the insurance company can't really use their own data to produce maps with higher resolution. So they pull out entirely rather than selling me insurance at a fair value.
That is NOT "the market working as intended". That is state regulation creating a market inefficiency, making people and businesses less able to actually adapt to climate change.
Are there particular reason(s) why this is being mandated? Can you point to particular examples of these mandates?
If you're talking about a coastal California home, the risk you're facing is the overall risk across California as a whole. The California insurance regulator is requiring insurers to continue to offer coverage in fire-prone areas in addition to fire-rare areas. All insurance products are based on statistical averages. This is a question of what homes are included in that statistical average. If insurers are required to offer products to customers in fire-prone areas, then insurers need to include statistics on fire-prone area homes when pricing for all other homes.
If California changes its rules and stops requiring insurers to offer insurance in fire-prone areas, huge regions of California would become uninsurable for fire, which means mortgages cease to be available in those regions, which means housing prices collapse, which means politicians and the state insurance regulator get voted out of office.
For elected officials, if the choice is whether to have all non-fire-area homeowners somewhat pissed or to have all fire-area homeowners carrying pitchforks into the legislature, they'll take the somewhat pissed option every time.
If someone moves from Florida to Georgia, or California to Colorado, then the former state loses their tax base (even in FL: sales/corporate tax).
So it sets up a musical chairs scenario where the state in question has every incentive to keep the game going.
Which will ultimately mean (a) using state revenue to balance out insurance plans and/or (b) outright fraud and shifting the risk burden onto someone else (looking at you and Fannie/Freddie, Florida).
TLDR There is an enormous amount of unpriced risk between GSE securities and potential insurance liabilities everyone is attempting to ignore.
https://www.nytimes.com/2024/12/07/business/economy/mortgage... | https://archive.today/wVcoy
> Mortgage Regulators Are Shrugging Off Climate Risk. It Could Cost Taxpayers Billions.
> Fannie Mae and Freddie Mac, which backstop most U.S. mortgages, know floods and fires are a growing problem. But little action has been taken.
https://www.richmondfed.org/publications/research/economic_b...
> The increasing frequency and intensity of extreme weather events present potential risks to real estate finance. It has been argued that mortgage lenders may be able to securitize and sell mortgages that are more exposed to risks of flooding to government-sponsored enterprises (GSEs). This possibility arises from two factors: the limited spatial variation in GSE guarantee fees (e.g., the fees are similar between houses with different flood risks) and the fact that GSE insurance mandates rely on outdated floodplain maps (which may fail to account for predicted increases in flood risks over the next 30 years). If this is the case, then there may be a concentration of flood risks at the GSEs, which play an important role in guaranteeing the stability of the mortgage market.
> However, the flood risk exposure of the portfolios of mortgages backed (purchased or guaranteed) by GSEs — specifically Fannie Mae and Freddie Mac — remains unknown. This article summarizes my examination of projected flood-risk exposures and the actual impacts of Hurricane Irma on mortgage defaults, documented in detail in my recent working paper "Leveraging the Disagreement on Climate Change: Theory and Evidence," co-authored with Laura Bakkensen and Russell Wong.
> Our first finding focuses on the GSE exposure to future flood risks. Restricting our attention to mortgages outstanding in 2023, the following table summarizes GSE portfolio exposure to future flood risk. We estimate that more than a quarter of outstanding mortgages — or more than 23 million loans, with a total outstanding balance of more than $2 trillion dollars — are at risk of future flooding, defined in this subsection as lying in a ZIP code with an average flood factor of at least 2.5 A smaller fraction (nearly 6 percent) are at higher risk, defined as lying in a ZIP code with an average flood factor of at least 3.
https://www.newyorkfed.org/medialibrary/media/research/confe...
> Conclusion:
> Mis-calibrated GSE insurance requirements → growth of fragile insurers.
> GSEs bear large unpriced exposure to climate due to insurance risk → taxpayer externality.
> Too much GSE mortgage origination in risky areas → distorted credit supply.
tl;dr - When insurers pull out, Florida creates some new insurers, rubber stamps them as financially solvent (even though they're not), these new entities insure properties, and then banks can originate new mortgages (because the properties are insurable) before rapidly transferring them to Fannie/Freddie (as they're secretly trash, but compliant). End result if properties are flooded, demolished, or burned? Insurers go bust and leave Fannie/Freddie holding the bag (the mortgage, now with no property securing it).
Either insurances mark given county incorrectly, and some competition will eventually catch up or they marked it correctly. Now just because somebody invested in bad property (or property became bad), why should some private company bear this mistake outside contract? I don't see a reason, I wouldn't do it neither.
Real estate, often massive, ain't some Geneva convention-enforced basic human right, just an investment. Maybe good old 'if its too good to be true maybe it isn't' mantra is valid also here? Be smart folks, not greedy.
Also if the home on photos is really the one article is about, I don't see any meaningful bushfire protection. That would be at least 30 meter clear cut perimeter with just rocks between forest and house - no dry grass, pine needles etc. I see forest literally ending next to house itself, thus actual 0 protection. Yeah in a frequent fire country that house is a disaster waiting to happen soon.
In Colorado, the maps are fairly transparent, yet I get the feeling that mitigation work is ineffective within predictions based on newer data.
The businesses[1] invest in fossil fuels. Meanwhile the humans keep living in dead-end locations for emotional and illiquid nonsense reasons, like “my parents” or “my job” or “stability for my children’s upbringing”. Then when the stove gets too hot Capital can just move. No skin off its back.
Yeah that sounds exactly like the market that I know is supposed to be working.
On the legislation front, a series of court cases and legislation combined with weak oversight meant that something like 70% of the nation's roof insurance claims were in Florida. There was clear fraud in many cases. Because of this legislation was introduced that made it difficult for any homeowner to file a legitimate claim. Combine this with under-capitalization by insurers and weak oversight and it's just a mess.
But the big one is housing. It's too expensive. And this is another inevitable consequence. It used to be that housing depreciated. That no longer seems to be the case. The replacement value is only going up. This is the foreseeable outcome of years of government policy designed to increase home values.
Ultimately we need to stop treating housing as an investment, as your retirement nest egg. All this does is steal from the next generation. That's it. Withholding shelter (ie housing) either by limiting supply through regulation and legislation or simply by pricing people out is state violence.
Housing prices need to come down. Hoarding housing needs to be massively disincentivized. We need to stop giving massive tax breaks to homeowners. None of this is popular but without major reform we're headed down a bad road.
Canada is heading towards crisis at the moment and many of its problems can be tied directly back to soaring house prices.
The consequences of high house prices are everywhere too. More expensive commercial real estate means businesses need to recoup that cost through higher prices.
House prices are a cancer on society
- Insurance Company Consolidation: As the industry consolidates, large insurers gain the ability to strategically drop unprofitable market segments. This allows them to improve profitability, but it often leaves consumers in those markets with fewer or no options.
- Regulations: Some states, like California, have introduced stringent requirements that compel insurers to continue providing coverage, even in high-risk areas. In response, many insurers have opted to exit these markets entirely. Consolidation has made this easier for them to implement at scale.
- Lack of Investment in Disaster Prevention: Across both Democrat- and Republican-led states, we’ve seen a decline in state and federal spending on preventive measures for natural disasters. This shortfall exacerbates the risks insurers face, further disincentivizing them from operating in high-risk areas.
The issue is not that the insurance regulations have tightened or changed. The issue is that the climate risks have heightened and the regulations have NOT changed to match the heightened climate risks.
Small increases in average temperature of the air leads to large decreases in average moisture content of brush and vegetation, making fires more common and more likely to impact more homes. The insurers have the data, that's why they are acting the way they are. Fires are more common and fires are larger. Not politics. Actuarial data compiled by insurance companies. If you've spent any time with insurance CEOs, you'll know they are not bleeding heart liberals. They tend to be very conservative and very data driven. And they have the data and it impacts their business.
The regulatory issue is that, to prevent historical forms of bad behavior on the part of insurers, state regulators require that insurers can only set pricing for fire insurance (for example) on the basis of historical data, not on the basis of forward-looking projections. That's the right thing for regulators to do in normal circumstances, when the risk environment isn't changing, but if the risk environment is changing it means you as an insurer will need to pay out money in the future at a higher rate than you did in the past, but you can only collect money based on lower historical payout rates. You are, in practice, required by the regulators to now offer your product at a loss not because the regulations changed but because the average daily temperature is increasing ever so slightly but just enough to significantly increase your cost. You don't want to offer a product at a loss, so you leave the market.
As to why insurance is a regulated industry, in large part that's because insurance is one of the few products the government requires you to purchase, distorting the market, and also in large part because there are massive asymmetries of information between consumer and provider - insurance companies have much more information about risks than insurance customers do, which prior to regulation led to abusive practices on the part of the insurers, in ways that led voters to say "this is a problem that needs to be fixed."
All big problems are hard, and insurance regulation is a big hard problem. If you just say "the environment is changing, so insurers should be able to set prices based on forward-looking projections" you help with the climate pricing increases but are likely to get other unrelated bad behavior at the same time (forward-looking projections are notoriously easy to fudge or fake in ways that are massively favorable to the person making the projections). If you don't allow for forward-looking projections, you lose insurers, if you do allow for it, you get abuses. "Just do it the right way" is much easier to demand in a blog post or comment thread than it is to deliver in legislation.
Fires in the USA are far less common than they were 100 years ago. Here's a rendered graph of data from the US National Interagency Fire Center:
https://consumerwatchdog.org/insurance/top-10-us-insurance-c...
These regulations have reasonable origins because as a mandated product it's pretty tempting to price gouge, but there's no exception for circumstances where the price really should be 3x the historical cost.
Problem solved?
I don't think it's fundamentally uneconomical to live in these places. It's just uneconomical in the current "nobody has any responsibility for anything it's all just financialized away" status quo in which it's ok to have plastic siding over a plastic-wood structure and shrubbery all about status quo. People will have to return to the "old ways" of corrugated steel, clapboard (or masonry or cement board) and super short grass and dirt for large distances around structures.
So if the 'problem' is _simply_ that people can't buy houses, I guess it's solved? If one words it more carefully - people can't buy houses that allow for a greater degree of economic stability and wealth accumulation - then no, problem not at all solved.
I see where you're going, and sort of think it could happen in some areas, but regulations might not permit that any time soon, even if 'pure' market conditions might call for it.
Interesting to think what this might do for the 'tiny house' market. Start zoning more places where people can put up $30k tiny houses. You might still need insurance for protection against personal injury on/in the property, but rebuild/repair wouldn't need to be a factor.
I have no idea what is the situation there, but there are also ways to preserve the ground against floods.
It's all about determining what is better, preventing the damage or abandoning the place.
Most likely, these houses will get bought by corporations to be rented out. They'll have the resources to self-insure. And at the next natural disaster the building falls down, renters are homeless, and what gets built in it's place will be 2x the price.
I believe the main part of what the insurance payout covers is rebuilding. And rebuilding is what's expensive, moreso now than ever. So I think housing prices would crash in an uninsurable area because you might be able to buy cheaply, but you couldn't afford to rebuild when something happens.
In the end, we'll all be climate refugees?
It depends if the problem is the insurance or the climate
Houses can't become a "cheap commodity" unless there are revolutionary new construction methods and/or alternative materials. E.g. something like cheap 3D printing of structural walls, ubiquitous robots, pre-fab modular rooms and roofs, etc and cheaper material alternatives to wood, concrete, tile, asphalt shingles.
Without a technological leap, traditional construction techniques will always have the baseline costs of paying expensive humans to rebuild the property. The labor costs of carpenters, plumbers, electricians, HVAC installers, roofers is ~50% or more of a house construction budget.
This means houses will always be "expensive" in relation to the average Starbuck's barista paycheck because of Baumol's "Cost Disease": https://en.wikipedia.org/wiki/Baumol_effect
Put another way, we've known for several hundred years in math that the derivative of x^2 is 2x. Disseminating that knowledge should be cheap. And yet the cost(salaries) of calculus teachers and math professors (and the associated textbooks) keep going up instead of down. That's the "cost disease" similar with building houses.
That's why a bunch of insurers abandoning the market doesn't won't change the economics enough for houses to become cheap commodities. Houses prices may adjust with lower sales prices but it still won't drop to "cheap commodities" level pricing. e.g. Florida condos' prices drastically fall because the Surfside collapse triggers law requiring millions in maintenance and rising hurricane insurance rates ... Starbucks baristas still can't afford those discounted condos.
However, to your point about "market forces" creating a new equilibrium in prices... you can buy houses in Detroit for $1 but that does come with other issues:
https://old.reddit.com/r/explainlikeimfive/comments/1ja3lm/e...
https://www.quora.com/Is-there-a-catch-to-buying-the-1-homes...
What neither of your links mention is that these are tax foreclosures or similar transaction and you are typically also buying the liability of back taxes owed on top of all the downsides that the links mention.
He keeps repairing because he is a general contractor and the house has history to him.
Now that is the funnest quote I have seen in 2024. I would love to know what government will lower your property tax if your house value falls ?
I have never seen that happen ever nor do I know anyone who has seen that happen over the past 40 years.
Plano, TX.
With such a significant drop in market value (can't get a mortgage on uninsurable property) the properties will just be abandoned, and twice as fast if the taxes aren't reassessed downward.
Take a look at Detroit and surrounding area property values in the late 1980s and 2008-2012.
You must live in a state without property taxes, or you just have no idea how they work. Either way, this is exactly how property taxes work.
If your assessed value goes down but all the rest stay the same, yes, your tax bill will go down. But if all assessed values go down by the same percentage, no your tax bill will not go down.
And this is the kicker: if all the houses close to the river or the seashore have their assessed value go down because of the flooding risk while all the other houses stay the same, their tax bills go up. So they really have a big incentive to not let that happen.
BIG CLIMA IS OUT TO GET YA.
Anyone have ideas on how to invest in other securities/properties to self-insure?
Homes should be an expense, not an asset.
That 100 or so trans folks in prison can’t access the bathroom of their choice or get healthcare they need.
Millions spent on supposed woke war to show the Dems they are “anti-woke”.
Senator Rick Scott who was caught with pants down embezzling billions in insurance fraud was voted again.
Florida did this to themselves.
What I hate, most of all, is that it's so often mandated -- and, yet, at the same time, so complex and annoying to attain. Half the time I need to buy some BS insurance for my business, I can't even purchase it online, I need to fill out a 20-part form and then "Speak with an Agent," who will resist giving me all of my options and make purchasing a personal ordeal.
I had considered, in a half-serious way, setting up an "insurance" company (probably incorporated in Sealand) that sells "basic packages" for very low prices -- and when you "speak with an agent," explicitly tells its customers that it will never pay out any claims. It would be nothing more than a fig-leaf, so that you can tell third parties, "yeah, I have insurance, don't bother me about it."
It would probably be illegal, which is sad. I just don't want to be annoyed and don't like being forced to deal with grifters.
The relatively low (and I have to tick boxes for most of the high risk industries on the form) amount that I pay each year for what seems to be a nice PI policy is easily worth it for the peace of mind.
As things are now, I'm mandated to spend $XXXX/year on insurance that I've never used and know, for a near certainty, that I'm never going to use. I'd really rather not. I've looked at the statistics and, for me, it's a better bet to eschew insurance. (Which, generally speaking, it would have to be, otherwise the insurance industry would be losing money.)
That's what most people say right up until they make a claim.
I'd even pay good money for (de facto-) fake insurance, just so mandates and overly-bureaucratic clients/partners leave well enough alone.
I think you're missing the point of why these "overly-bureaucratic clients" are insisting on insurance. I don't want you to have insurance to keep you safe, I need you to have insurance to keep me safe. When the widget you built for me breaks and damages my customer and I end up owing them €1m, I want to be able to recoup at least some of that cost from you. It won't be you making a claim on your insurance, but me (or rather my insurance company)
And as someone who used to be at one of those "overly-bureaucratic clients", we not only required (and checked) that you had insurance, but also that your insurance coverage was actually high enough for project in question.
I'm not sure that follows.
I build something, send it to you. You integrate it, test it, make it production-ready, and ship it. If something breaks in testing, that's pretty normal, and it would be on me to fix -- and presumably contractual agreements would preclude damages at that stage.
If something breaks after you ship it to your own customer, that really ain't my responsibility. If you try to make it my responsibility, it would be a matter for the courts and not a matter for insurance. If you're looking for a quick payout from insurance, or if you think that insurance companies are less motivated to defend claims in court, that's reasonable -- but it's by no means necessary, and certainly not a social good. Insurance sets up incentive problems that ought to be avoided.
The specifics of the contract is besides the point. Taking you to court is meaningless unless you also have insurance, since if you're a freelancer or small company there is no way to get any money out of you. You'll just declare bankruptcy and be on your way and we'd still be stuck with the bill, even if it was you that screwed up. You having insurance is insurance for your customers that they have some chance of recompense if you screw them in some sort of way.
The requirement for the policy some clients have are only there because they're multinationals and it's a company-wide policy. Local clients never expect contractors to have a policy.
I think at my current premiums I would need to pay insurance for 100 or 1000 years to even get close to the sort of numbers that get thrown around for a day's worth of damages on some of these projects.
The likelihood is absolutely that nothing serious will go wrong, that if it did it wouldn't make it to the courts and furthermore that if it did it wouldn't be negligence of any kind, or was covered within the contract itself.
But the thought of having skipped out given the possible consequences; No thanks, value my sleep too much.