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.
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I only recently left Florida after living there for many years (with a long interlude in Europe). I figure the house I lived in just did fine, just as it did for so many hurricanes before. No, the killer living there before is about to get worse–homeowner’s insurance. It skyrocketed after the three hurricanes in two weeks in 2004. Insurance companies one after the other pulled out of Florida afterwards, and were a bigger factor in homeowner defaults than is given credit for. One-third or more of a monthly mortgage payment in Florida goes to insurance, and while my actual principle and interest were manageable, the insurance on top of it was a killer. The state created its own insurer of last resort, paid for out of state taxes, in an attempt to avoid the trainwreck, but that was the dirtiest trick of all. FEMA re-drew flood zones into huge areas not the least prone to flooding just to force more homeowners into the flood insurance pool. I paid a surveyor to assay my property, four feet above the 100-year flood plain, got my certificate and got exempted, but none of my neighbors did.
Three years ago my mortgage shot up by $600/month. I reviewed their estimate and found it was all increased insurance costs. I broke out the policy mailed to me and found all sorts of new taxes added by the state legislature, called “fees” and “service charges.” I had to opt out of them separately, many could only be opted out of by writing, and some could not be opted out of at all. I had to reduce coverages just to get the mortgage payment back to where I could handle it–I was taking on more risk at more cost in order to subsidize the insurer of last resort for the nice houses on the water. But as I was leaving Florida they were getting theirs at last, with waterfront owners seeing up to $10,000 increases in annual premiums arriving in the mail.
I got out at the right time. I don’t see Florida coming out of this very well at all. It’s a dangerous assumption that there is enough capital available, even now, to rebuild. Seriously, does Puerto Rico have a chance?
The only people who should be building in these high-risk areas are people who can afford to lose a house. Now, hurricanes in Florida will always be a risk, and there’s a reason people along the coastline used to live in shacks, and still do in most of the world. The forest fire risk in the West is the result of many governmental blunders, including mismanagement of forestry on Federal lands and diversion of water resources to the desert cities of the Southwest. But all the development and risk is definitely abetted by subsidizing the risk management and also by requiring the broadest possible distribution of risk. Rate the coastal zones, the rockslide zones, the flood and wildfire zones, etc., according to actual risk and watch urban sprawl and environmental degradation slowly recede!
“No insurance… no mortgage. No mortgage… no sale. No real estate value… no tax revenue.”
That sounds like a nice way to keep the good credit debt suckers from gentrifying an area. Where I live one could make an argument for pulling insurance on account of fire danger. For people who don’t have the resources to compete with those who can invoke finances such coverage holes could by an opportunity. Though with the understandable down sides. Or, would such areas drop in price, but still be owned by folks who can put cash on the barrel head?
I could see these insurance gaps growing and being the seedling beds of the deindustrial future, even as the ever shrinking insured areas maintain the show of industrial civilization for generations to come.
A little history. Prior to Hurricane Sandy, environmentalists and conservatives got together and passed a reform to federal flood insurance, which is effectively bankrupt, to push it toward actual market rates. Why should poorer people subsidize beachfront mansions?
Just as the reform was expected to take place, Superstorm Sandy hit, the worst case scenario for New York City. The far more likely scenario is for a Northeastern hurricane to hit Long Island, with all those beachfront mansion in the Hamptons. But Hurricane Sandy took place late in the year, somehow merged with a nor’easter, and went backwards, shoving the ocean into New York harbor.
As a result, a large share of the people affected were working class or even poor, in places such as the Rockaways. Cops, firefighters, dishwashers, busboys. So the reform was watered down.
The only way out, as I can see it, is no flood insurance for new buildings in flood planes. A limit of $240,000, or six times median household income, on payouts. And a requirement to take the money and run, no rebuilding. That might, over 100 years, reverse what happened in the previous 100.
After Sandy, the cost of our home insurance soared, even with a $20,000 hurricane deductible. Because we are in a “coastal county” and I live within a mile of the Gowanus Canal. Very close to the top of the terminal moraine, the highest point in Brooklyn.
Great post, Johnny! Learned something new today. ❤ G
What does that mean for the Florida Keys and Barbuda? Any insurance there now will be hugely expensive, if it is even available. Rebuilding won’t happen if there are no mortgages because no one will insure it.
Rebuilding will occur this time. And rebuilding will occur in the next round of storms. And the one after that. Government will fill the gaps and provide a financial back stop if need be. But over time the accumulated costs are going to make it harder and harder to justify these expenses and the manner in which things are rebuilt is going to tighten up. Increased regulations will make anything small uneconomical while really big things will get bailed out. This is a long slow process that will be most acutely felt a generation from now.