How Long Will Taxpayers Subsidize Growth in Climate Risk Areas?

People keep moving to climate high risk areas, coastal or inland flood plains, or wildland-urban interface areas.
Part of me says, “Well, have at it hoss.”
Another part of me says, we are all going to be paying for this, in increased insurance rates, higher infrastructure costs, and ultimately bailouts when inevitable disasters occur. But for how long?

Climate change is accelerating, with an increasing likelihood of widespread disruptions to the financial sector, including the insurance sector. – Bank for International Settlements

Bloomberg:

As insurers start to pull out from markets battered by the fallout of climate change, governments are increasingly at risk of having to foot the bill, according to the Bank for International Settlements.

“This trend, if left unabated, may lead to an insurance market failure for climate-related risks and ultimately force governments to become ‘insurers of last resort’,” researchers from BIS’s Financial Stability Institute said in a report.

Financial watchdogs are stepping up scrutiny of insurers to monitor the developing risks as the industry retreats from markets deemed too risky to cover. BIS researchers are urging the industry, governments and regulators to work together to ensure there’s adequate and affordable insurance to cover the extreme weather events ahead.

Most people don't understand what a 100-year storm means. It means that there's a 1% chance it will occur each year.

A better metric would be "chance during a 30-year mortgage".

For 100-year and 500-year events, this is 26% (1 in 4) and 6% (1 in 16).

— Andrew Dessler (@AndrewDessler) November 26, 2023

The finance industry is proving slow to address the risks posed by climate change to their operations, their capital, cash flows and customers. That’s as the absence of good-quality data means insurers face major hurdles in accurately estimating the losses they face.

“A major complicating factor is the uncertainty over future climate change impacts, which may unleash extreme events that have not occurred in the past for example due to climate tipping points,” the researchers said. “There could also be spillovers to other financial sectors — including the banking sector — if insurance is no longer available.”

What’s more, insurers aren’t generally making climate considerations explicit in their pricing and underwriting policies, according to the BIS report.

What is clear, though, is that a growing number of insurers is retreating from high-risk areas. The trend is likely to continue as insurers “gain greater awareness and knowledge in incorporating climate-related risks in their pricing and underwriting approaches,” the researchers said.

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Good, longer article in the New York Times spotlights the issue for the Carolina coast.

New York Times:

The hurricanes keep coming, and the people, too: The fastest-growing places along the Atlantic coast this century are also among the most hurricane-prone.

Between 2016 and 2022, the five hurricanes that hit the Carolinas cost the two states over $33 billion in damages in current dollars, displaced hundreds of thousands of people and led to the deaths of more than 90, government data shows.

There’s every reason to expect more damage in coming years: A warming climate adds moisture to the air, unlocking the potential for wetter and more powerful storms. And rising sea levels make storm surges more damaging and coastal flooding more frequent.

And the newcomers will keep coming: One 2022 study projected that by 2050, population growth will increase the number of Americans exposed to flooding nearly four times as much as climate change will alone.

It’s not just that people are moving to hurricane-prone areas. The growth itself can make flooding worse. Cutting down trees and paving over wetlands takes away open land that would otherwise absorb rainfall.

“We just seem to be going through this vicious cycle that is becoming more vicious with the amount of people and infrastructure we put in these areas,” Mr. Still said.

Federal law permits people to build in flood zones, so long as they meet certain minimum standards. In return, the government offers them flood insurance through a federal program that is over $20 billion in debt — largely due to escalating hurricane damages.

While the National Flood Insurance Program was originally intended to discourage floodplain development, in practice it has done the opposite by removing a lot of the financial risk involved, said Jenny Brennan, a climate analyst at the Southern Environmental Law Center.

States have a few options to discourage people from building in flood zones. They can create more stringent building requirements, or they can buy up and preserve undeveloped land. But these measures are expensive, and rely on political will or the willingness of landowners to sell.

One way that states can move residents out of harm’s way is by offering to buy out their homes and permanently converting that land to open space. But a study this year found that for every home bought out in North Carolina between 1996 and 2017, more than 10 new ones were built in the state’s floodplains.

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After a disaster, the surge in demand for short-term housing drives up already high rents. Poorer residents often rely on the state and local governments for assistance with evacuation and housing.

The problem lies in where to house them. “If there is zero housing availability in the community right now,” Mr. Still said, “where do you put 100,000 people?”