New Modelling Highlights America's "Climate Insurance Bubble"

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First Street Foundation, a climate risk focused non-profit research and technology group, has released “The 9th National Risk Assessment: The Climate Insurance Bubble”, highlighting the contribution of underpriced insurance, driven by regulation and compounded by climate change in the real-estate market. First Street's research found that across the United States, 39 million properties are at high risk of flooding, wildfires, and hurricane winds which have yet to be reflected in the insurance premiums they pay.

Based on its three peer reviewed flood, wind and wildfire models and a collaboration with engineers at Arup, First Street says its able to combine risk with the physical location and characteristics of buildings at the property level to provide new insight into the likelihood and cost of climate related risks today and 30 years into the future.

“As extreme weather events increase in frequency and severity due to climate change, it is essential that homeowners across the United States are properly aware of their unique, multi-hazard risk profile and equipped with adequate protections through their insurers,” said Ibbi Almufti, Principal at Arup. “By having accurate, future looking data at our disposal, we can better prepare for the worst physical and economic impacts of a warming planet in the present and future.”

Breaking down the findings by peril, First Street found that 12 million properties have significant flood risk outside of the public facing FEMA flood zones, 23.9 million properties are in areas with a high likelihood of destructive 3 second wind gusts, and 4.4 million properties are concentrated in zip codes where wildfire risk is so great that an average of at least 10 structures are expected to burn down every year. More broadly on wildfire risk, the 5-year average costs of wildfire events increased dramatically from about $1 billion annually through about 2016 to over $17 billion in 2021 with the growth in structures destroyed by wildfires (+215%) outpaced by the additional area burned (+48%) over that same time period.

“This work highlights the degree to which the changing climate is directly impacting the larger economy through shifts in the insurance market and home devaluation,” said First Street's Head of Climate Implications Research, Dr. Jeremy Porter. “The cost of climate exposure is not simply the damage from the floods, wind, and wildfire; it also makes its way into many other connected parts of the economy, and we are seeing that now in the insurance industry and real-estate market.”

First street found that 6.76 million properties are exposed to a level of risk that makes them uninsurable by the private market. Participation in California's state-run FAIR plan increased by 90% between 2015 and 2021, growing to nearly 270k policies. Florida's Citizens Insurance Agency has grown from under 500 thousand to about 1.3 million today (+168%) polices in force since 2016 - now making it the largest insurer in the state.

“The over reliance of property owners on state run insurers of last resort is a big flashing sign that standard practices in the insurance market cannot keep up with our current climate reality,” said Matthew Eby, Founder and Chief Executive Officer of First Street Foundation. “We are rapidly moving to a place where the cost of insurance will make the most at-risk homes effectively uninsurable.”

First Street Foundation makes their property-level information publicly available through its Risk Factor® website, where every property owner may find their Fire Factor®, Wind FactorTM, Flood Factor®, and Heat Factor® and the estimated damages associated with their risk. More broadly, this information is available for communities, states, and governments to help inform decisions regarding climate risk, so that people, properties, and communities may be adequately protected from climate risks.

Image: First Street Foundation