A new study reports that U.S. homes will lost 6% of their value in the next 30 years, or a collective $1.47 trillion (that's trillion, with a "t"), because of climate change and the staggering premiums that insurers will have to charge to cover the growing risks.
The study by First Street, a group that focuses on climate threats to housing, says the home insurance premium amounted to about 8% of the mortgage payment not long ago. Today, the average is closer to 20%. And First Street says premiums will rise an average of 29% by 2055, not counting inflation, to catch up with the risks that aren't currently priced into premiums (partly because of resistance from regulators) and to account for the growing threats from climate change. Some locales may see premiums double or quadruple, soaring so high they become unaffordable.
Unless....
... insurers find a way to work with homeowners, regulators and other government officials to reduce the risks. Saving homeowners some significant portion of $1.47 trillion would be a huge service to humanity, while being immensely profitable for insurers.
And I'm not sure I've ever seen the media so sympathetic to insurers, on any subject, so now would be a great time to start.
The report by First Street says insurance currently underprices climate risk for 39 million properties across the continental U.S. That's 27% of the total.
And First Street projects that as premiums soar to match the growing risks, the decline in housing values will just be the beginning of the disruption. It talks about climate change migrants — people who move to escape its effects. First Street says there will be 5 million such climate migrants this year alone and 55 million by 2055. Among other things, First Street predicts that the migration will slow the growth of the Sun Belt. (It also singles out Sacramento, which I live near, as one of the cities that will be hit hardest by rising insurance premiums. Hmmm.)
A lot will happen between here and 2055, so the effects are hardly set in stone. But the report lays out in stark detail the opportunities — and challenges — that homeowners insurance presents for aggressive, forward-thinking insurers.
The way the report has been covered, along with recent stories about insurance, also shows remarkable sympathy for insurers, caught between frightening climate scenarios and regulators wanting to protect consumers from too-rapid disruption. We're all used to seeing complaints about heartless insurers canceling policies and not paying claims, so the different tone has been refreshing.
Here is an essay in the New York Times, described as a joint effort between ProPublica and the Times, that presents the First Street data as requiring price increases by insurers. The same with this piece in USA Today, which sneaks in a little brag about how long and extensively the publication has been writing about First Street, in particular, and climate's effect on home ownership, in general. Here is another piece in the Times, this one laying out the oh-so-very-long timeline for people trying to rebuild after the recent fires in the Los Angeles area, dramatizing the pain of restoration and, thus, the importance of prevention. Here is a piece sympathetic to insurers in the Washington Post. I could go on.
I wrote just three weeks ago about what I think next steps for insurers should be, as they try to help policy holders harden their properties and prevent damage from future natural disasters, so I'll merely summarize here:
- Engage with regulators and government officials at all levels and use the shock from the LA fires as a way to get to the tough conversations that need to be had about pricing risk properly and about how to persuade policyholders to change risky behaviors. These conversations must go way beyond the 22% increase in homeowners premiums that State Farm just filed for in California.
- Educate those who have lost properties on how to build back stronger and encourage them to do so.
- Try to get information on climate risks to potential buyers or builders of homes long before they're about to sign on the dotted line. Zillow has taken steps in that direction. The First Street study is another example. There must be many more.
- Help communities develop and stress test plans to better protect themselves.
As much as we all hope the LA fires will mark a turning point in the thinking about climate risks for homeowners, we also know that we have so very far to go. But the First Street report provides some dire forecasts that can serve as sort of anti-targets, as outcomes to avoid.
Let's keep building momentum.
Cheers,
Paul