In the past few years the costs associated with climate change have increased, for society, the economy and individuals. Managing the costs and learning to adjust to the risks associated w climate is going to be important for financial planning going forward.
Fire have ravaged California for the past few years burning millions of acres and displacing thousands of families. As a result, drier conditions and years of drought forest areas have become more vulnerable to fires.
State officials have seen “an increase in residents who received nonrenewal notices from their insurance companies.” (1)
Because of building trends and vulnerability insurers have started to re-evaluate their exposures. Many homeowners have found their policies have been dropped even though they themselves have not filed a claim. On a recent conversation with a client who lives west of San Francisco she had this happen to her. She was forced to look for other coverage. In the end she found coverage but according to a recent article, not everyone does. And if they do many have to pay a higher premium due to the risk of fire.
“More frequent and intense wildfires are making it harder for homeowners to find and keep insurance in California, a state regulator warned Thursday.
“The problem of insurance availability is going to expand” after last year’s record-breaking wildfires, California Insurance Commissioner Dave Jones said in an interview Thursday. He said growing rates of non-renewal and rate increases for people in wildfire zones are “entering a critical stage.”” (2)
But this isn’t just a California problem…
“The pressure on California’s market is a warning for states elsewhere, according to climate and industry experts. The number of acres consumed by wildfires each year has doubled since 2000, according to federal data. The Union of Concerned Scientists warns that warmer and drier conditions caused by climate change will mean even more fires. Meanwhile the number of people who live in the most fire-prone areas keeps growing.” (2)
According to leaders in the field the situation is not expected to improve any time soon.
“Awareness of fires “is not just because the news is covering it more”, said Michael Wehner, a senior staff scientist at the Lawrence Berkeley National Laboratory. “More acres are burning. That is almost certainly due to climate change.”
As the climate shifts, so does fire behavior. Summers are longer and drier. Sometimes the winter rains are meager for years, as in the recent five-year drought. Sometimes, like this year, they are torrential, producing explosive plant growth that, several months later, desiccates into prime accelerant. The needle is moving, but where it will stop is anybody’s guess.”
‘Climate change is continuing to unfold,” said Anthony LeRoy Westerling, a professor of management of complex systems at the University of California, Merced. “The impacts from it will probably accelerate. There won’t be a new normal in our lifetimes.” (3)
Another category of risk is storm surge, flooding and hurricanes. An example is daytime flooding events in areas like Miami. Areas that are low lying and subject to storm risk find they are experiencing flooding due to high tides, where once they did not.
“Beyond the damage to homes, roads, or other infrastructure, the flooding also threatens drinking water and plant life. Ultimately, of course, it means large parts of the city could become permanently uninhabitable.” (4)
As a result, property owners are starting to feel the financial pinch. People are finding it harder to obtain flood insurance which is required for mortgage financing. People are finding fewer potential buyers interested in their shore properties that they are offering for sale. Amy Rush, author of “Rising”, a novel about sea level rise, recently shared a story of one of the people she interviewed. He offered his property for sale several years ago hoping to sell ahead of the rush. When she recently reconnected with him she found that he has still been unable to sell the property and has had to reduce the price many times. In the meantime, several other properties have gone up for sale on his street creating an oversupply. (5)
A central problem is the viability of the National Flood Insurance Program in the Anthropocene era.
“Having good flood insurance is more important than ever, but the National Flood Insurance Program (NFIP) will expire at the end of the month, leaving Rhode Islanders in the lurch with no way to sell or protect their homes.
“Right now anyone who lives in a flood zone requires flood insurance to get a mortgage, and if the insurance falls through, you won’t be able to buy or sell a house,” said Joe Luca, the president of the Rhode Island Association of Realtors.
A longer-term solution to fix NFIP is unclear. NFIP is under such a mountain of debt due to claims tied to Hurricanes Maria, Irma, and Harvey, that last October Congress had to pass a bill to forgive $16 billion in deficits that the program had accumulated.
Currently premiums are too low to cover flood claims, and with another hurricane season coming it’s unclear as to how much longer the program can stay afloat, even if it’s extended past July 30.
For some the problem lies in the maps used by FEMA to define areas in flood zones.” (6)
The challenge was clear following the impact of the flooding in Houston in 2017 due to hurricane Harvey.
‘Texas officials say some 49,000 homes have been damaged by the massive flooding that has come in the wake of Hurricane Harvey. The vast majority of the owners don’t have flood insurance.
Most insurance policies don’t cover flooding damage. To obtain it, homeowners go through the National Flood Insurance Program, which is administered by the Federal Emergency Management Agency.
But even though the premiums are effectively subsidized by the government, most people choose not to take out flood insurance, especially those who live in areas not generally considered flood-prone. ‘ (7)
Rising seas not only threatens buildings, it threatens infrastructure. A recent study shows rising sea levels could flood the underground cables that carry the internet, potentially causing widespread outages and enormous business disruption.
“Seawater is likely to submerge more than 4,000 miles of internet cable in the U.S. and engulf more than a thousand data centers that house servers, routers and other hardware, researchers at the University of Wisconsin-Madison and the University of Oregon said in a paper presented July 16 at an internet conference in Montreal.
The inundation could come within 15 years. “That was a little bit unexpected,” said study co-author Paul Barford, professor of computer sciences at the University of Wisconsin. “We sort of expected that it might be parceled out over a longer period of time, but that’s not the case.” (8)
On the other side of the ledger companies and individuals that address climate risks may see financial benefits to their investment in addressing climate risks.
Energy storage is a way to reduce the high cost of electricity due to summer price spikes. Typically, during the summer energy prices rise due to higher temperatures and increase energy demand in related to air conditioning needs.
“Green Mountain Power suggests 500 distributed Tesla Powerwalls plus two larger energy storage facilities have saved its customers $500,000 this summer during peak demand hours.” (9)
Both individuals and companies are beginning to realize they need to start integrating potential climate risks into their financial calculus. Climate risks can disrupt cash flow and sales if their customers are in areas that are vulnerable. Climate risks can disrupt supply chain impacting manufacturing and employees. Climate risks can affect raw material costs and transportation.
While businesses are driven to focus on meeting or exceeding quarterly earnings expectations, they also need to plan and adjust to risk as they develop. By planning companies, and individuals, can reduce their potential vulnerabilities and improve their potential financial prospects in the long term.
We need to expand our definition of risk to incorporate climate change and the conditions it magnifies, such as fire, storm, flooding, etc. As you examine these risks and your vulnerabilities it’s important to examine how they can potentially impact your financial security not just today, but in 5, 10, and 20 years from today.
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2018-64068 Exp. 8/20