NEW YORK — Storms later this year might just blow down an important line of defence for US homeowners. Warmer ocean surfaces and weaker trade-wind patterns are setting the stage for an especially fierce hurricane season.
Two states already are propping up their insurance industries. A wave of insolvencies would be problematic, but not as much as unaffordable premiums and declining property values.
There will be 11 hurricanes in 2024, based on forecasts released last month by researchers at Colorado State University.
If the prediction is correct, it would be four more than the average recorded over a recent three-decade span. There's also a qualitative element: Climate change keeps bringing more intense wind and rain.
Despite rising sea levels and stronger storms, however, there's little evidence yet that US homeowners are suffering as a result. Florida house prices, for example, have increased 23 per cent faster than the national average since 1980, using US Federal Housing Finance Agency data.
A range of state and federal government subsidies, including mortgage tax breaks and beach rebuilding, help spur the trend and slow modifications to risk assessment, according to findings published by scientific journal Nature Communications in March. This blunts the effect of volatile, but rising, hurricane expenses.
A massive hurricane in Miami, one of the country's 50 most populous cities, is the nightmare scenario, not just for its 450,000 residents, but also insurers. The odds of it happening in any given year are low, but one struck about a century ago, destroying much of what was there.
Another one now could leave as much as US$1.4 trillion (S$1.9 trillion) of damage, a joint study by the University of Cambridge and Munich Re estimated in 2018. Insured losses might approach US$400 billion.
In 1992, Hurricane Andrew made landfall in South Miami-Dade County as a Category 5 storm, one with winds that exceed 157 miles per hour, and caused US$26 billion of wreckage — US$58 billion in today's dollars. It was the costliest natural disaster in US history, per the National Weather Service, until Hurricane Katrina walloped New Orleans 13 years later.
Anything cataclysmic in Florida or Louisiana also would probably trigger economic ripple effects. State governments and insurance companies might be forced to re-evaluate their policies, budgets and prices, and align them more closely with the realities of climate change. It would be a painful way to hammer home the idea that hurricanes are not just somebody else's problem.
Property and casualty insurers would be in some trouble. Unlike life insurers, which aim to keep enough in reserve to cover payouts over multi-year periods, their P&C counterparts tend to focus on stretches only lasting a few years. They also offload risk to reinsurers.
Moreover, most big underwriters pulled back from Florida after Hurricane Andrew, leaving the business to smaller, less-capitalised rivals.
A dozen have gone into receivership or cancelled their policies since 2020. Fewer storms and a new law limiting litigation helped insurers in the Sunshine State collectively generate a profit in 2023 after six consecutive years of losses, according to credit rating agency S&P Global. A big storm almost certainly would sink several more of them, however.
Reinsurance companies also would be affected. They have more than US$600 billion of dedicated capital and another US$100 billion in alternative forms such as catastrophe bonds, Gallagher Re says.
With the ability to raise additional money, most should be in position to withstand even a monster storm. The catch is that reinsurers often transfer liability in opaque exchanges, which leaves the possibility of counterparty risks that aren't transparent to market participants.
The real challenge would begin after any damage is tallied. Reinsurance is already expensive, and rates undoubtedly would rise as thinly capitalised companies exit while those that remain demand higher returns on freshly appraised exposure. Catastrophe bonds, whose healthy yields and lack of correlation to other assets usually attract buyers, also would be pricier.
Homeowner insurance might become too exorbitant, however. Average annual premiums for Floridians already have reached about US$6,000, or roughly three times the national average, the Insurance Information Institute trade group says.
Other coastal states are also in a bind. Louisiana's insurers paid out about US$3 in claims and expenses for every US$1 of premium earned in 2020. After four hurricanes hit the state, the figure jumped to US$4.62 in 2021, credit rating agency AM Best calculated.
Insurers folded, and more of them abandoned the state. Rising premiums may now be sufficient, that is unless another monster hurricane hits. But prices in the Pelican State are almost as high as in Florida, and household income is about 25 per cent lower than in the rest of the country.
State programmes can offer discounted rates, but they may leave others footing the bill. Florida's Citizens Property Insurance, a government entity, is the state's largest provider. It's already contending with buckets of red ink.
A storm with US$200 billion of insured losses might cost it another US$30 billion, based on its 15 per cent market share. The actual number probably would be higher because Citizens is a victim of adverse selection by insuring those who can't find a policy elsewhere.
While Citizens can replenish capital — Florida has the right to impose surcharges on policies written by other companies — the eventual cost will simply be absorbed elsewhere. Louisiana's insurer of last resort, meanwhile, raised premiums 63 per cent last year.
Such inflation ultimately will depress property prices. The average home in Louisiana costs about US$200,000. If insurance cost, say, US$3,500 a year before the recent hike, and owners expect a consistent seven per cent return, then a 63 per cent increase should lower house values by about 15 per cent.
Rising premiums also prompt owners to live without insurance. The percentage of uninsured American homeowners has risen from five per cent in 2015 to 12 per cent in 2023 according to the Insurance Information Institute.
Florida tops the list with up to 20 per cent lacking coverage. This development will lead to devastating outcomes. For those paying a mortgage, banks require coverage, meaning higher premiums will eat into disposable incomes.
The extreme result is that more people move away, exacerbating state fiscal burdens. Louisiana's population is shrinking, and Cameron Parish, which was hit hard by Hurricane Laura, has lost about 15 per cent of its residents since the Category 4 storm struck four years ago, the government estimates.
About seven million, or five per cent of US homes are covered by insurers of last resort, or cost more to insure because of climate-related risks, research outfit First Street Foundation risks.
It also sees elevated chances of wind, flood and wildfire damage to an additional 39 million properties putting them in danger of substantially higher premiums or losing their policies. This hurricane season might just be the one that wrecks the financial calculus on home ownership.
There will be 11 hurricanes in the Atlantic basin in 2024, five of which will be major storms, Colorado State University researchers said in a forecast issued on April 4. Between 1991 and 2020, the average was 7.2 hurricanes and 3.2 major storms.
The higher activity is being attributed to warmer sea surface temperatures in the Atlantic Ocean and a transition from El Niño to La Niña conditions in the Pacific Ocean.
Researchers said conditions resemble those from 1878, 1926, 1998, 2010 and 2020.
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