“Swirling the Drain”: Senate Hearings on Home Insurance and Climate Risks

Senator Whitehouse opens a new hearing on climate and insurance risks to homeowners with a reference to a recent cover story in the Economist – which is available with registration at the link.
(I’ve been unsuccessful finding this on C-span, appreciate if anyone can find the rest of the hearing from June 5)
Above, the Senator gives a good summary of the current situation.
Especially important, in Florida, where many homeowners have been driven to a state funded Insurer of last resort, Citizens (which Governor DeSantis recently declared “insolvent”) – which, if the funds run low, can levy a statewide surcharge on all insurance customers.

“Good luck with that.” quipped Whitehouse.

The Economist:

Insurers usually bear the costs of repairs after a storm destroys a roof or a fire guts a property. As the climate worsens and natural disasters become more frequent, home insurance is therefore getting more expensive. In places, it could become so dear as to cause house prices to fall; some experts warn of a “climate-insurance bubble” affecting a third of American homes. Governments must either tolerate the losses that imposes on homeowners or underwrite the risks themselves, as already happens in parts of wildfire-prone California and hurricane-prone Florida. The combined exposure of state-backed “insurers of last resort” in these two states has exploded from $160bn in 2017 to $633bn. Local politicians want to pass on the risk to the federal government, which in effect runs flood insurance today.

Physical damage might be forestalled by investing in protection in properties themselves or in infrastructure. Keeping houses habitable may call for air conditioning. Few Indian homes have it, even though the country is suffering worsening heatwaves. In the Netherlands a system of dykes, ditches and pumps keeps the country dry; Tokyo has barriers to hold back floodwaters. Funding this investment is the second challenge. Should homeowners who had no idea they were at risk have to pay for, say, concrete underpinning for a subsiding house? Or is it right to protect them from such unexpected, and unevenly distributed, costs? Densely populated coastal cities, which are most in need of protection from floods, are often the crown jewels of their countries’ economies and societies—just think of London, New York or Shanghai.

The last question is how to pay for domestic modifications that prevent further climate change. Houses account for 18% of global energy-related emissions. Many are likely to need heat pumps, which work best with underfloor heating or bigger radiators, and thick insulation. Unfortunately, retrofitting homes is expensive. Asking homeowners to pay up can lead to a backlash; last year Germany’s ruling coalition tried to ban gas boilers, only to change course when voters objected to the costs. Italy followed an alternative approach, by offering extraordinarily generous, and badly designed, handouts to households who renovate. It has spent a staggering €219bn ($238bn, or 10% of its gdp) on its “superbonus” scheme.

The full impact of climate change is still some way off. But the sooner policymakers can resolve these questions, the better. The evidence shows that house prices react to these risks only after disaster has struck, when it is too late for preventive investments. Inertia is therefore likely to lead to nasty surprises. Housing is too important an asset to be mispriced across the economy—not least because it is so vital to the financial system.

Governments will have to do their bit. Until the 18th century much of the Netherlands followed the principle that only nearby communities would maintain dykes—and the system was plagued by underinvestment and needless flooding as a result. Governments alone can solve such collective-action problems by building infrastructure, and must do so especially around high-productivity cities. Owners will need inducements to spend big sums retrofitting their homes to pollute less, which benefits everyone.

At the same time, however, policymakers must be careful not to subsidise folly by offering large implicit guarantees and explicit state-backed insurance schemes. These not only pose an unacceptable risk to taxpayers, but they also weaken the incentive for people to invest in making their properties more resilient. And by suppressing insurance premiums, they do nothing to discourage people from moving to areas that are already known to be high-risk today. The omens are not good, even though the stakes are so high. For decades governments have failed to disincentivise building on floodplains.

WFLA Tampa on potential surcharge that Whitehouse mentioned, the so-called “Hurricane Tax”.