No Calm Before the Storm: U.S. Coastal Communities At Risk Of Becoming Uninsurable As Storm Activity Scares Insurers

Real Estate, Insurance Organizations

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DBRS Morningstar published a commentary examining the effect of large weather systems on U.S. coastal regions and the risk of certain properties becoming uninsurable. Some of the key highlights of the commentary include:

-- The effects of climate change have elevated the impact of tropical storms by increasing ocean temperatures, and raising sea levels, a major factor that determines the intensity and devastation of tropical storms.
-- Significant development in hurricane-prone areas is contributing to greater economic and insured losses, as coastal states continue to attract new residents, a trend that could be curtailed given the rapid increase in insurance premiums and relatively high mortgage rates, making affordability an issue.
-- Insurance companies are exiting catastrophe-prone regions, leaving homeowners and businesses with limited coverage options. This may lead to a decline in property valuations in the long term if owners are unable to secure insurance.
-- Reliance on government programs, like the National Flood Insurance Program, is expected to continue growing as private sector insurers restrict coverage or exit high-risk regions.

“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,” says Steven Jellinek, Vice President, Head of Research, North American CMBS. “The exit of insurers from catastrophe-prone states in the U.S. creates an insurance coverage gap. We anticipate that this could eventually be a trigger for declines in property valuations in the affected regions in the absence of alternative sources of insurance protection,” says Victor Adesanya, Vice President, Insurance, Global Financial Institutions Group.