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We find that residential properties exposed to flood risk are overvalued by US$121–US$237 billion, depending on the discount rate. In general, highly overvalued properties are concentrated in counties along the coast with no flood risk disclosure laws and where there is less concern about climate change. Low-income households are at greater risk of losing home equity from price deflation, and municipalities that are heavily reliant on property taxes for revenue are vulnerable to budgetary shortfalls. The consequences of these financial risks will depend on policy choices that influence who bears the costs of climate change.
Among the natural hazards exacerbated by climate change, flooding is the deadliest, costliest and most widely experienced in the United States. Currently, more than 14.6 million properties in the United States face at least a 1% annual probability of flooding 5, with expected annual damages to residential properties exceeding US$32 billion 6. Increasing frequency and severity of flooding under climate change is predicted to increase the number of properties exposed to flooding by 11% (ref. 5) and average annual losses (AALs) by at least 26% by 2050 under Representative Concentration Pathway (RCP) 4.5 6, presenting substantial costs to property owners, insurers, mortgage lenders and the federal government.
The increasing burden of flooding under climate change has led to growing concerns that housing markets are mispricing these risks, thus causing a real estate bubble to develop 7, 8, 9. While empirical studies have observed an average discount of 4.6% for properties located in the 100?yr flood zone 10, recent evidence suggests that this price discount does not fully capture the expected costs of flooding 7, 11. One study estimated that properties in the 100?yr flood zone could be overvalued by an average of 8.5% of their current value 9, not accounting for increasing damages from climate change. This unpriced flood risk could perpetuate perverse incentives for continued development in floodplains and underinvestment in hazard mitigation, further inflating the housing bubble. Despite these concerns, the magnitude, distribution and potential social and economic consequences of overvaluation in US housing markets remain uncertain.
“You get to cherry-pick the policies,” Lucas said, describing how he has been able to select hundreds of thousands of favorable policies — and the revenue that comes with them — from Florida’s state-run Citizens Property Insurance Corp. “You are underwriting and cherry-picking the best policies,” he added, “leaving kind of the worst ones there.”
In Florida, this is what’s known as a takeout, in which an insurer is able to assume thousands of policyholders and millions in premiums in one swoop, without fees or acquisition costs. Florida officials created the system about 30 years ago to try to shrink the exposure of Citizens, the state’s insurer of last resort, and attract new carriers after Hurricane Andrew sent major carriers scrambling.
That opportunity is what drew Lucas to the industry in 2012 when he created Heritage Insurance, and what’s behind Slide. He’s far from alone. Dozens of start-ups have flocked to the state over the years lured by the chance to grow big.
But while this system has been working for some top executives like Lucas, it has been crippling many residents and disaster victims, who are paying some of the highest prices in the nation for insurance while experiencing some of the worst claims handling and processing times, according to an investigation by The Washington Post. For many victims of last year’s catastrophic Hurricane Ian, the dysfunction has crushed their livelihoods, with scores still living in unfinished homes.
The irony is that many of the business practices of insurance companies are increasing risks to their customers. For example, State Farm, AIG, and Liberty Mutual, among other insurers, have significant oil and gas holdings which, along with coal, are the primary source of greenhouse gasses. Recognizing the potentially significant financial risks posed to insurers’ investments in oil, gas, coal, and utilities, California has required insurers with more than $100 million in annual premiums to disclose their investments in fossil fuels. California’s most recent data showed, for example, that State Farm held approximately $30 billion in fossil fuel assets.
Supports ALEC
At the same time, insurance companies are also quietly lobbying against measures that would protect individuals and communities from costly climate impacts and risks. State Farm supports efforts by the American Legislative Exchange Council (ALEC) to get legislators to oppose any “government action to disincentivize, penalize, or restrict carbon dioxide emissions” as these are “counterproductive and harmful public policy.” ALEC also supports efforts by some state treasurers to penalize banks and asset managers that are reducing investments in coal and other fossil fuels. Such “anti-ESG” measures are costly for taxpayers.
