Secondary perils are smaller events following a primary event. Hurricanes, flooding, wildfires, drought and sea level rise. Secondary perils are not modeled (accounted for) in reinsurance underwriting. Sixty percent (60%) of 2020 insurance catastrophic losses were caused by secondary perils. As secondary perils are modeled and priced into reinsurance all insurance rates across the board will rise.

With insurance companies worldwide now starting to report to investors and regulators how insurance companies are mitigating their climate risk. Lloyd’s of London is reporting to all insurance companies that climate change is now the number one risk in the future effecting: insurance underwriting, and risk management models. Which in turn will effect monthly insurance premiums. Strategic alliances are now in full collaboration mode worldwide! Insurance companies have changed their statistical modeling from using historical data to incorporate forward looking scientific data to predict future climate change events. Such as: hurricanes, floods, wildfires, droughts, rising sea levels , earthquakes, and disruption of the worlds food supply chain.

Insurance is all about risk assessment and financial accumulation and is the world’s largest industry with annual premiums between 4 and 5 trillion dollars accounting for over 7 percent of the global economy, a portfolio of 30 trillion dollars of assets under management. Over 125 worldwide insurance firms, from over 25 countries are actively participating in climate change research and developing climate change services and products. However it is interesting to note that insurance companies are not politically active lobbying, on climate change, carbon tax issues, or greenhouse gas emission  requirements. With climate change now identified as the number one underwriting risk, insurers are paying out larger claims from complex weather related events. Increasing losses from all types of property damage, global supply lines, and business disruptions. Mounting claim losses in turn create rising consumer premiums and effect insurance affordability.

One prime example is the cost of flood insurance on coastal real estate.  As sea levels rise, from melting polar ice caps directly due from climate change effects, waterfront property values fall. Flood insurance premiums are rapidly rising in Norfolk VA, Atlantic City, and St. Petersburg Florida. This has effected the value and marketability of homes which require flood insurance now costing $7,000 annually per property! Rising sea water and sinking coastal land effects exactly which properties are determined to be located in the national flood zone. These flood zones are nationally documented by FEMA maps. However current FEMA maps document past flooding, and do not predict where future flooding will occur. As a direct result from rising sea waters,

Federal policymakers have now redrawn national flood boundaries.(FEMA) This in turn will require more home owners to pay for the rising cost of flood insurance. As individual insurance companies leave the market, the price of flood insurance is now too exorbitant for homeowners. Therefore flood insurance now incorporates subsidized premiums by state agencies who now rely on the National Flood Insurance program. Currently masking the risk and current real price of monthly home ownership. As this issue slowly emerges, there will be an adverse effect on mortgage financing. With government lenders loaning less money and homeowners required higher down payments(40%).

This results in a quagmire for home buyers, as mandatory disclosure of past flooding, the current and future cost of flood insurance is not required by law. Preliminary studies indicate sea level could rise by 1.4 to 1.8 feet by 2050. This is the time frame of a traditional 30 year mortgage.  Eventually mortgage financing could collapse before a single home has been consumed by the ocean. However in December 2020 The federal Reserve has joined Network for Greening the Financial System (NGFS). In January 2021, the Biden administration has made climate change a national priority striving for 2050 US net zero status.

The search for coastal real estate located on higher ground has started to slowly emerge on both coasts. As waterfront property is now slowly loosing its value! There is now initial deflation on water front properties with a documented seven percent (7%) decrease in appraised value. In central Miami Florida and “little Haiti” developers are now incorporating sea level rise, aka climate risk in their future development real estate modeling. Purchasing coastal properties on “higher ground” is slowly becoming a fundamental prerequisite. This has led to climate gentrification slowly displacing lower income immigrants to purchase their low income properties resulting in climate refugees. These transitional properties are being purchased simply because of their higher coastal elevation. Developers will scrape these low income shanties and this will become the new future waterfront coastline. Climate change is driving this pricing gap to become more visible between riskier homes and safer homes by knowledgeable sophisticated investors.

The same process is occurring on the west coast. Malibu beachfront living is slowly loosing its luster. As the ocean front sand slowly dissolves into the pacific ocean, due to rising global temperatures. Celebrities like Lady gaga and Brad Pitt are purchasing California real estate located on higher ground. Still able to have ocean views, although situated on higher elevation real estate.

As these lower elevation properties sink into to ocean and a new coastal shoreline is developed savvy climate wise real estate investment trusts (REIT ESG) will develop new waterfront communities. However, using predictive modeling, clever site manipulation, space planning, using onsite fill to raise the construction elevation grade, constructing sea barrier walls to a higher datum point will create synergies between sustainability and resiliency. Additional resilient features will include: roof mounted generators, protected electrical equipment above the 500 year flood plain, main entrances facing away from the ocean,and incorporating wet flood proofing techniques. Incorporating and documenting these climate resilient strategies (flooding, wind storm ocean rise) will actually reduce insurance premiums as resiliency has now been constructed and incorporated into the new coast line community!

In the near future, when climate change modeling an ancillary extension of green underwriting will become mandatory into real estate purchasing and selling decisions, greenbrokers and their commercial counterpart sustainable brokers will become indispensable allies. Their expanded specialized green knowledge will be a sought after commodity as million dollar real estate decisions are being pondered by future sustainable homeowners and commercial Reit esg trusts.