In Part 1, CoreLogic® and BCG® investigate the top five myths associated with climate change and the resulting physical risk in real estate
Climate change and its influence on the potential physical risk to real estate is shaping the future of the U.S. housing market. As ocean temperatures change, greenhouse gasses collect in the atmosphere and global temperature increase projections mount, the U.S. housing market — and its largest asset class — faces a significant threat.
To prepare interested parties to weather this climate evolution, in the first of a three-part series, BCG® and CoreLogic® provide a comprehensive overview of the impact that physical perils will have on the residential housing market in the U.S. and some of the misconceptions surrounding climate risks.
Misconception: Physical climate risks are mostly a “coastal” issue – the rest of the country doesn’t face the same risks
While the impact of climate perils is more pronounced in certain geographies, it’s not always the coastal markets that bear the brunt of the consequences resulting from natural catastrophes.
High-profile events such as Hurricane Ian and Hurricane Nicole could easily lead to the assumption that Florida has the highest risk of loss potential. However, that designation actually goes to the Northeast, where there is a greater risk of insured loss due to the number of structures and their density.
It’s not just U.S. coastal areas that incur physical risks, as CoreLogic pointed out when identifying some of the riskiest areas to live due to climate change. While low-lying coastal areas are particularly prone to sea rise, storm surges and hurricanes, there are growing concerns about the increasing frequency and severity of other perils, such as inland flooding, wildfires and droughts. As we saw this winter in California, when three successive storms created an atmospheric river dropping massive amounts of rain and snow across the state, inland flooding already presents serious physical climate risks.
As an example: Houston received significant media attention due to Hurricane Harvey, an unprecedented flooding disaster that affected hundreds of thousands of homes and caused $125 billion in damage. And yet, there are many inland metro areas like Dallas and St. Louis, where severe convective storms (for example thunderstorms) are projected to lead to higher-than-expected annual per-capita losses than all of Houston’s climate perils combined.
Wildfires are also a serious threat to homes, businesses and lives across the U.S., but their effects can spread far beyond the point of ignition. The recent wildfires in Canada, which were fueled by high temperatures and low precipitation, caused severe air-quality problems across Canada and on some parts of the U.S. East Coast.
Misconception: Insurance will cover most of the future losses of climate perils
Another misconception when it comes to considering climate risk is that insurance will provide most of the protection against physical climate risks. However, there are numerous market shortcomings that pose potential issues.
There are varying levels of coverage maturity across different climate perils.
Flood insurance and coverage for events like storms have been available for many years. In fact, the National Flood Insurance Program (NFIP), which provides affordable insurance to property owners in flood-prone areas, is a requirement for mortgage holders in Special Flood Hazard Areas (SFHAs) to maintain flood coverage for the life of a loan. This requirement does not mean that the cost of losses due to a natural hazard will be entirely covered by the insurer. Under the NFIP’s rating methodology, the cost of flood insurance may increase considerably with each claim payment, resulting in potential affordability concerns.
Other perils, like wildfires, have become more common in areas where they may have historically been rare. In such instances, the risks and insurance prices can be difficult to quantify, leading insurers to charge higher premiums, provide limited coverage or deny coverage entirely.
In many parts of the country, insurers are struggling to service or are actively pulling out of higher-risk housing markets.
Major hurricanes have pushed insurance markets to the edge in Florida and Louisiana. The state-run property insurer in Florida has said that it might impose a surcharge on millions of policyholders if another major hurricane hits. Financial pressures have led multiple insurers in these states to exit markets in recent years, and re-insurance companies are backing away from carrying the risk and/or substantially raising rates.
Wildfires have also caused insurers to reconsider their coverage in California. Recently, major insurers have declined new applications for property insurance in the Golden State. California is most at risk for property damage from wildfires, with CoreLogic’s 2022 Wildfire Risk Report estimating that more than 1.2 million single-family homes are vulnerable.
Existing insurance maps are not up to date and do not factor in projected risks within an area.
Many homeowners in flood-prone areas already underestimate or are unaware of the extent to which their property is at risk. And it’s not just those owners in floodplains and SFHAs that are at risk. CoreLogic’s analysis shows that over 30% of expected losses due to flooding occur outside of designated SFHAs
As the climate continues to change, the impact of physical climate risk that already has a material impact on the U.S. housing market will only increase in the coming decades. As real estate is one of the largest asset classes globally, and homeownership is a key source of American wealth, accurately understanding the physical risks associated with properties is essential to mitigate and manage them going forward.
In parts two and three of this series on how physical climate risk is shaping the future of the U.S. housing market, CoreLogic and BCG will dive deeper into the implications of climate risk in lending and explore the challenges surrounding resiliency solutions in the property market.