Managing Climate Change Costs
New tools have emerged to help navigate the increasing impacts of weather-related events
By Patrick Duffy
With recent climate data showing the hottest global months of September, August and July since consistent temperature records have been kept, it should come as no surprise that insurance companies are increasingly pulling back or out of markets with high risks of climate-related and other natural hazards.
While this is partly due to their premiums for reinsurance coverage rising too fast to remain competitive, in California it’s also been due to regulators preventing insurers from hiking premiums over a pre-set percentage. For an increasing number of property owners in states including California and Florida, their only option is a state-run, “insurer of last resort,” often paired with high premiums.
For other property owners without a mortgage in place, some are opting to cross their fingers and self-insure against potential losses. Today’s potential homebuyers are certainly well aware of these risks, with a survey earlier this year by Zillow reporting 83% of respondents considering at least one climate risk led by flooding, wildfires, heat waves, hurricanes and droughts.
Notably, it’s not just insurance companies and homebuyers looking at these risks – it’s also a growing list of banks, public companies and REITs that are under added pressure to provide risk assessment data to stockholders and investors. Fortunately, for individual consumers and investors wanting to research local hazard risks, in 2021 the Federal Emergency Management Agency (FEMA) expanded its Climate Risk Index to cover any United States county or Census tract and includes 18 hazard types including the following: avalanche, coastal flooding, cold wave, drought, earthquake, hail, heat wave, hurricane, ice storm, landslide, lightning, riverine flooding, strong wind, tornado, tsunami, volcanic activity, wildfire and winter weather.
As the growing impacts from a warmer climate point to more significant financial losses, the traditional models which look at past catastrophes to predict future losses are quickly becoming less useful.”
The risk index numbers are relative based on comparisons to similar geographies for Risk, Expected Annual Loss, Social Vulnerability and Community Resilience. If a given Census tract’s Risk Index percentile for a hazard type is 80.00, then its Risk Index value is higher than 80% of all U.S. Census tracts. However, because it’s being compared with other Census tracts, its score can be different versus its associated county. For the Risk Index and Expected Annual Loss components, percentiles and ratings can be viewed as either composite scores for all hazards or individually.
However, as the growing impacts of a warmer climate point to more significant financial losses, the traditional models that look at past catastrophes to predict future losses are quickly becoming less useful. That’s where a company such as Climate Alpha comes in, which has historically targeted institutional clients but earlier this year launched HOMES, a free tool that calculates the financial impact of climate change between now and 2040 at the Census tract, county and state level. The tool leverages its Resilience Index for more than 30,000 zip codes in the continental U.S., allowing potential buyers to compare the cost of ownership beyond the traditional metrics.
A more robust tool for professional investors offers additional scenario planning at the county level. For example, although Los Angeles County has a “business as usual” climate risk score of 59 (medium), its vulnerability score is 64 (high) while its readiness score (33) is low. Two other scenarios predicting future emissions and economic stability range from optimistic to pessimistic.
Like FEMA, Climate Alpha separates its risk into individual indicators but is also able to provide them at the MSA level for comparisons. Specific risks include heat, hurricane wind, fire, coastal flooding, inland flooding and drought. For resilience, these include energy transition, energy reliability, social robustness, location wellness, economic momentum and infrastructure. To provide more useful financial forecasts, the company also developed a method to translate past real estate price indexes such as those on housing from the Federal Housing Finance Agency or commercial real estate sectors from various private sources in absolute dollar terms with an error rate of below 2.5%.
The resilience indicators are important because well-run communities are likely to recover much faster than those that are struggling. Climate Alpha is also planning an update and global roll-out of its proprietary technology in late 2023 which will include the states of Hawaii and Alaska, and offer forecasts of the financial impact from climate change for real estate assets at five different periods: current, in five years, in 10 years, in 2050 and 2100.
Patrick Duffy is the founding principal of MetroIntelligence and contributes to BuilderBytes.
