As climate change continues to alter the atmosphere and contribute to sea level rise, higher rainfall rates, and an increase in hurricane intensity, it is more important than ever for insurers to be aware of how climate change is impacting hurricane risk and the subsequent impacts on homebuilding.
For the 2021 Atlantic hurricane season, the National Oceanic and Atmospheric Administration (NOAA) has projected a total of 13-20 named storms, 6-10 hurricanes and 3-5 major hurricanes, defined as Category 3 or higher. But how do changes in climate impact hurricane risk? And how is homebuilding impacted?
NOAA asserts that sea level rise will contribute to higher coastal inundation levels for landfalling hurricanes. This flooding likely means more damage to coastal properties and an increase in the need for reconstruction.
Another consequence of rising global temperatures is more moisture in the air. With higher temperatures, more water from the ocean evaporates into the atmosphere. NOAA concludes that tropical cyclone rainfall rates will likely increase due to this phenomenon.
Climate modeling studies indicate that in the event of 2 degrees Celsius of global warming, rainfall rates could increase by 10-15% within 100km of a storm. More rainfall means more flooding and more property damage. NOAA projects the global proportion of tropical cyclones that reach very intense levels (Category 4 and 5) will likely increase.
The impact on housing and homebuilding
After major hurricanes, property damage can include damage to interior walls, flooring, roofs, windows, exterior structures, and contents within the home. This is why housing inventory often declines significantly after disasters as homes on the market are damaged.
In the aftermath of a hurricane, many uninsured homeowners are left with few options. With homes damaged, people are displaced, often living in temporary housing accommodations and spending on new expenses. Damages to workplaces can also interrupt their flow of income. These factors contribute to a rise in mortgage delinquency in areas hit by disaster. For example, Houston’s mortgage delinquency rate increased from 6.2% in August 2017 to 10.9% in October 2017 following Hurricane Harvey.
In our recent 2021 Hurricane Report, CoreLogic analyzed the impact of a hurricane on the real estate economy, as detailed in the table below:
Another factor contributing to mortgage delinquency is underinsurance. For those who are insured, many residents discover their homes are underinsured by hundreds of thousands of dollars. This can happen when insurers base their coverage on replacement cost rather than reconstruction cost.
It is recommended to regularly re-evaluate the reconstruction cost value of a home to prevent underinsurance, as material and labor costs for reconstruction are always changing. When homeowners are left without enough coverage to rebuild, many of them walk away from their mortgages, creating spikes in delinquency and overall negative impacts to the health of the housing economy.
The resilience of these coastal communities - high income or low - continues to be a focal point of prevention and preparation. The only way forward is to understand what really is at risk, and educate, prepare and collaborate with everyone who has a stake in the ongoing crisis, including insurance companies, lenders, government agencies and the families on the front line.
How insurers can prepare
Climate change is forcing insurers to adapt to a new operating environment where they need to keep up with changing scientific understanding of climate change, regulations, investor goals, and variables for risk modeling.
Insurers should confirm that their catastrophe modeling tools account for climate change mitigation measures. These mitigations range from hard measures, which include physical engineered structures such as flood defenses, to soft measures, such as the removal of combustible debris or the sacrificing of agricultural land for flooding. The ideal catastrophe model can incorporate the added variables of physical risk mitigations.
Insurers should also make sure that their policyholders are aware of hurricane mitigation measures they can implement on their own. This includes hurricane ties, which stop strong winds from blowing a roof off, boarding windows with sheets of plywood, or removing items from yards to prevent projectiles. By incorporating multiple mitigation methods before disaster hits, structures can be made less vulnerable to hurricanes.
The 2021 Hurricane Report provides insight into property risk, both nationally and by metro area, across single-family homes and multifamily homes from hurricane-driven wind and storm surge. With this knowledge in hand, we can all better protect the homes, families and businesses we love.
With the potential for sea level, rainfall rates, and hurricane intensity to rise, it is more important than ever for insurers to be aware of how they can be resilient in the face of an uncertain future.
