Climate change increases the risk of financial disaster for homeowners, insurers and bankers

Growing weather-related risks from climate change, from coastal hurricanes to western wildfires, are increasingly putting pressure on insurers, who are raising interest rates and pulling out of parts of the country in a bid to stay in business.

And just this summer, two large insurance companies left Florida, adding to the long list of companies leaving the state.

In July, Farmers Insurance was announced He will no longer write the state’s policies; In August, United Property and Casualty went bankrupt. 22,000 Floridians were left high and dry And all Floridians have to foot the bill to save her.

Banks could be next, said Dennis Kelleher of the public interest nonprofit Better Markets.

“The banking crisis comes right after the climate and insurance crisis,” Kelleher told The Hill. “Every time an insurance company sounds an alarm, the banks have to shudder, because they get the bill.”

Unprecedented disasters

The unprecedented hurricane that ripped through the Florida Panhandle is the latest in a series of billion-dollar disasters to hit the United States this year.

As of early August – before the fires that devastated Lahaina, Hawaii, and before Hurricanes Hillary and Idalia – the US had experienced 15 climate disasters with more than $1 billion in damages. According to federal data.

And those disasters became more frequent. In the 1980s, nearly three months separated such large-scale disasters – but for the past five years, such disasters have been happening. every three weeks.

Backing these losses is the insurance industry, which has seen its costs increase exponentially in recent years. And in 2021, the industry as a whole will make its payments Almost $4 billion more than I got And in 2022, in the aftermath of Hurricane Ian, those losses swelled more than six-fold to nearly $27 billion, according to a review by a leading insurance trade group.

In the aftermath of these disasters, some insurance companies have left areas where the risk is higher, leaving increasing numbers of Americans behind Without insuranceaccording to The Wall Street Journal.

This poses a risk to banks for nearly Two-thirds of homeowners in the United States You pay a mortgage to a lender – which is generally a bank.

The banks, in turn, use these homes as collateral for a dizzying array of loans and related derivatives — all based, Kelleher said, on the increasingly outdated assumption that real estate itself is backed by insurance.

In the past, this made a lot of sense. Banks did not worry about losing the properties against which the loans were written, but rather about maintaining the smallest possible spread between the equity the homeowners were paying and the potential losses if they defaulted.

This assumption allowed banks to assume a loan-to-deposit ratio of 80 to 90 percent — meaning that a bank might have only 10 cents or 20 cents in deposits or real assets for every dollar it lent.

This type of ratio doesn’t offer “a great deal of protection,” Kelleher said, “but at the end of the day, it’s okay because you own the physical assets.”

But with the onset of disasters caused by climate change, “the quality and reliability of physical assets has declined dramatically.”

Add to this the departure of the insurers, he added, and the banks face the prospect of total losses to the property destroyed by the disaster – losses that would have been largely offset by insurance payments in earlier eras.

A wave of defaults is coming, Kelleher said, one that will hit small communities and regional banks first.

“We’re not talking about a decade, we’re talking over the next few years that there will be major consequences for the banking and financial system of what the insurance companies are suffering now,” he said.

lack of data

It is not clear how many uninsured properties there are in the US, which in itself is a risk.

“Although you’d think that state insurance regulators would have created such a database and series of reports through the National Association of Insurance Commissioners, that’s unfortunately not the case,” said Carly Fabian, insurance and climate change specialist at the nonprofit Public Citizen. . said the hill.

Regulators are struggling to catch up. The National Association of Insurance Commissioners announced in August that it would Build a comprehensive data set To help identify where “insurance availability and affordability” is most challenging in the United States

Fabian noted that this was a move they had previously opposed, “suggesting they feel pressure” to get more data on the problem.

Some progressive lawmakers want state insurers to focus on collecting data to see where the risks are worst.

“If you buy a home in Pensacola today, current projections of sea level rise through 2050 mean that your home will most likely be underwater before you pay off your mortgage,” Rep. Sean Kasten (D-Illinois) told The Hill.

He added that as insurers find out and stop writing policies in those areas, the “cascading effect” risks rippling through the financial system, as financial institutions unload loans, potentially threatening financial stability in the United States.

“Congress and federal regulators have an obligation to do more to address this,” Kasten said.

Kelleher argued that financial regulators need to require “stress tests” in which the main banking regulators — the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation — require banks to review the risks of their failure to address various risks. levels of dangerous climate disturbance.

Even when these tests are done, it is not clear that banks take them seriously. In the European Central Bank’s stress test that imagines a world in which global temperatures reach 3°C by 2050 – three times their current level – banks have taken their total losses. It will be only 78 billion dollars.

The ECB itself noted that this figure “significantly underestimates actual climate-related risks”.

The role of fossil fuels

In the US, there is an additional problem: Both regulators and banks are under fire from the Republican Party and the broader fossil fuel industry, which is struggling desperately to maintain the free flow of credit to the industry.

When the Fed announced last year the opening of a preliminary pilot that would require six banks to review their climate risks, Republicans objected, arguing that this was the beginning of a move to stop fossil fuel financing.

“The Fed’s new “pilot” program is the first step toward pressuring banks to reduce loans and investments in traditional energy companies and other undesirable carbon-emitting sectors,” said former Sen. Pat Toomey (R-Penn.), which at that time was in first place. banking committee member, In a statement, he said in 2022.

“There is no risk from global warming that banks are completely unable to price in their decisions, and the Fed’s involvement in this process highlights that the real danger lies with the government.”

Whether banks can or not, Kelleher said, they are light years behind insurance.

“All bankers are associated with, you know, accusations of vigilance and the power and influence of the oil and gas industry. They should be more like the insurance industry, who cares why a climate catastrophe might happen?

“The only thing they should care about is what the risks are, and what they should do about the risks.”

But while their stance on reducing their direct exposure to climate change may be different, on the one hand, Public Citizen’s Fabian points out, banking and insurance go head-to-head: both are happy to continue investing in the very fossil fuel whose combustion is causing the problem. worst.

“Even as they pull out of homeowners, insurance companies like State Farm remain major investors in fossil fuels, and others like AIG are large investors and principal underwriters of fossil fuel projects and companies,” she said.