Underwriting and Under Water

Andy Koenigsberg

Dec 12, 2016

Insurance is a huge part of the world economy. The world’s insurance companies hold about $30 Trillion in assets. To get an idea of how much money that is, the US economy is about $17 Trillion.

One thing all insurance companies won’t do is insure you for flooding. You have to buy a flood policy through the Federal Flood Insurance Program because insurance companies know that they will pay out more in flooding claims than the will ever receive in premiums or returns from investing those premiums. They won’t touch it. This insurance isn’t cheap. I don’t live in a flood zone and flood insurance would increase my home insurance premiums by 60 percent.

According to FEMA, $1.2 Trillion in property in coastal areas are insured by the National Flood Insurance Program. $484 Billion of that in Florida alone. Who is on the hook for losses under that program? You and me, that’s who, because the premiums for flood insurance don’t come close to covering the projected losses.

The most recent available projections are that sea level will rise by about 6 feet by the end of this century, if we do nothing to limit temperature increases to 2 degrees C (and we are already at about 1.2 C). This number does not include daily tidal fluctuations, which can be a few feet depending on location or storm surges which can be a dozen feet or more.

But you don’t have to wait for the collapse of the Antarctic or Greenland ice cap to have your whole day ruined. Just a couple of feet can render a property worthless. This isn’t speculation. It’s already happening.

According research published almost two years ago, sunny day nuisance flooding during high tide is already occurring up and down the eastern seaboard and has increased 10 fold since the 1950s. In south Florida, daily high water levels have been increasing an inch a year. This flooding kills lawns and trees, destroys septic systems, and contaminates aquifers.

The net effect is that it is making people less likely to want to buy a property within 10 feet of sea level. Home prices in coastal areas have dropped over the last 10 years whereas they have gone up most everywhere else. This is true in coastal Massachusetts as well.

Mortgage companies are also in the risk management business, at least they are now, a decade ago, not so much, but I digress.

The mortgage industry is closely watching sea level rise. According to the chief economist of Federal Home Loan Mortgage Corporation (Freddie Mac) “. . . between $66 billion and $160 billion worth of real estate is expected to be below sea level by 2050. By the end of the century, the range is $238 billion to $507 billion”. In Florida, the chances that up to $346 Billion in property will be submerged by 2100 is 1 in 20. I think the likelihood is far higher than that.

These trends will lead to the collapse of the coastal housing market much sooner than 2050. Within a few years, what banker in their right mind would write a 30-year mortgage for a coastal property under even the most optimistic scenarios of sea level rise, especially in places like south Florida? What home buyer would buy a home in a flood prone area? What are the knock-on effects of such a collapse on the rest of our economy?

The answers: None, no one, and nothing good.

A coalition of 29 insurance giants, including Allianz, Lloyds of London, and Swiss RE, among many others, have observed that “Since the 1950s, the frequency of weather-related catastrophes, such as windstorms and floods, has increased six-fold. As climate-related risks occur more often and predictably, previously insurable assets are becoming uninsurable, or those already underinsured further compromised.” Losses have quintupled since the 1980s alone. There is an increasing gap between potential losses and how much insurance coverage is actually available right now.

Major multi-national insurance companies have no reason to make this stuff up and this coalition is putting its money where its mouth is, by reconsidering how they invest their vast assets which include funding projects which increase society’s ability to cope with floods, storms, and heat waves.

Insurance companies are very concerned about global warming, even if our incoming political leadership denies its existence, because they actually see what is happening. As one insurance executive stated, “We understand climate change as underwriters, because we are trying to manage the physical consequences of the severe weather we get from climate change.”

Already, no one will insure a home that could be underwater. Soon, no one will finance a home that could be underwater, and by this I mean literally, not financially.