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Coastal communities at risk of becoming uninsurable

A new analytical report anticipates increased reliance on government insurance programmes as insurers exit catastrophe-prone states in the US.

The report No Calm Before the Storm: U.S. Coastal Communities At Risk Of Becoming Uninsurable As Storm Activity Scares Insurers released by DBRS Morningstar rating agency said these departures could eventually trigger declines in property valuations in the affected regions if alternative sources of insurance, like the government programmes, cannot step up.

North America CMBS vice president and head of research Steven Jellinek said, “In what some are referring to as a real estate ‘climate bubble,’ there are concerns that dwellings located in high-risk communities may experience a decline in value in the long run if something is not done to adequately fill the coverage gap left by departing private insurers.”

The authors of the commentary said they do not foresee any immediate rating implications because of the exit of insurers from the affected regions. They, however, said that individual properties and transactions could be affected if property prices decline because of expensive or unavailable insurance coverage.

Data from Morningstar and the US Census Bureau shows that the states most affected by hurricanes experienced significant population growth in their coastal counties from 1970 to 2020. Florida experienced the highest population growth during that time — a 217% increase — and is the state where most hurricanes make landfall.

Meanwhile, Morningstar reports that insurers have been increasingly exposed to larger and more frequent weather-related losses that are driven by climate change and affected by rising real estate values and higher concentrations of high-value properties in risk-prone areas.

Several major insurers have said they would stop writing new business or renewals in Florida, California and other states as the industry manages the impact of natural disasters, inflation, rising replacement costs and other loss adjustment expenses.

The Morningstar commentary said, “With continued coastal population increases and infrastructure development along the hurricane-prone Atlantic and Gulf coastal states, we expect that economic damages and insured losses as a result of tropical storms that make landfall during the annual Atlantic hurricane season will continue to rise.”

There is a growing scientific consensus that increasing ocean temperatures intensify the devastation of tropical storms. According to Swiss Re, tropical cyclones, storms and flooding have been the main drivers behind global catastrophe losses. Another study published recently revealed that Atlantic hurricanes are now more than twice as likely to rapidly intensify from minor to major hurricanes.


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