Last month I sat in a friend’s kitchen and listened to him describe a tricky situation he was trying to navigate with his insurance company. He had just received a notice that his home owners policy would not be renewed because his insurer calculated that the risk of forest fire was too high. There hasn’t been a fire in this area for decades, but many similar landscapes across the western US have experienced significant damage in recent years. The company is taking prudent action ahead of the curve to limit its liability by dropping the territory.
My friend had to scramble to find alternative coverage with another company and quickly discovered that all the insurers were pulling out at the same time. The actuaries were drawing red lines on the map. Lots of them. Everywhere. He eventually found a broker who secured coverage from an obscure company for twice the usual amount.
I was reminded of a bill I got from my insurance company shortly after the 9/11 attacks of 2001. The cost of coverage for my little beach cottage in Hawaii increased by $100. This is when I first discovered how re-insurance works.
All insurance companies around the world buy insurance from other insurance companies in order to spread risk across the greatest possible area and draw on the largest available pool of financial resources. If a regional or national insurer is hit with too many losses in a single event the entire planet’s worth of funds can be tapped from aggregators like Munich Re and Swiss Re. When the Twin Towers came down that extra $100 was effectively my share of that global risk.
Hurricanes Harvey and Irma caused a fair amount of damage in Texas, Florida, and the Caribbean. The cost to insurance companies, governments, and individuals will be spread far and wide just as with Katrina and Sandy before them. But the industry is already tapping talent and technology to recalculate future risk and adjusting standards and practices accordingly. The amplitude of variability (higher highs, lower lows) is increasing just as more people build more things in more marginal locations. There’s just a lot more stuff in harm’s way than there used to be.
New subdivisions keep sprouting in areas that are well known to flood yet the desire for economic growth and development pushes forward relentlessly. These homes in the Sacramento delta are just a couple of feet above water under normal circumstances. Toss in particularly strong winter rains, above average snow melt from the Sierras in spring, and a little earthquake action to shift the topography and a whole lot of real estate is going to be compromised. Multiply tens of thousands of such situations across the country and you start to get a feel for the future.
By the way, if a property can’t be insured it can’t be financed either. No insurance… no mortgage. No mortgage… no sale. No real estate value… no tax revenue. Long before actual events occur large swaths of the built environment are going to fail in anticipation of the next round of statistical vulnerabilities.