When the Hurricane Francine struck the southern house of Louisiana of Kee Kee Kee Julien-Judson in September, the real estate agent was already financially under the water of the damage caused by IDA, the tropical storm which struck three years earlier.
The day after Ida's strike, with water that was still flowing in her house, she had traveled several kilometers to get a phone signal so that she could call and make an insurance complaint. Despite the deposit quickly, she said that she spent the following year to continue her insurer and finally “faces the money” to repair her house.
“When my credit cards were rather high, I said,” Ok, I'm just going to withdraw this from my savings account, then when they give me my check, I'm going to take it back “”, she said. She estimates that her possible payment dropped by around $ 40,000.
Consequently, when her insurer pushed her annual insurance premium to nearly $ 12,000 following Francine, she wondered if she was to leave Louisiana. But the arrow cover costs have also depressed the value of his house, which is its main financial asset – leaving it unable to consider a sale.
Storms intensified by climate change reduce the value of properties in affected areas and finance of affected households, the increase in insurance premiums contributing to the borrowing of the higher credit card and to cause economic growth, because families divert rare economies to cover the costs of reconstruction and relocation.
Natural disasters caused $ 320 billion in losses last year, according to Munich Re reinsurer, and disasters are generally cost the insurance industry more than $ 100 billion each year.
The increase in the bill has left decision makers and regulators concerned that climate change could constitute a systemic threat to the financial system.
The American federal reserve asked its supervisors to assess the risks linked to the climate in important banks in 2020, during the Biden administration, President Jay Powell calling for climate change a “emerging risk” to financial stability. Other central banks, including the Bank of England, the European Central Bank and the Reserve Bank of India, launched their own probes.
Five years later, the atmosphere has changed. Although some regulators have continued to warn that extreme weather conditions could trigger market panic, others are less convinced that climate change will be systemally significant – especially since financial institutions have withdrawn from high -risk areas, to transfer costs to governments and individuals.
It was the point of view that Powell expressed in February testimony to the Senate banking committee. A few weeks earlier, and a few days before the return of the skeptic of climate change Donald Trump to the White House, the Fed had withdrawn from the network to lock the financial system, a central banks coalition studying climate threats.
“If you are going quickly by 10 or 15 years, there will be regions of the country where you cannot obtain a mortgage, there will be no automatic ticket distributors, the banks will not have branches,” said Powell. However, he said, this would mainly threaten access to consumers to financial services, rather than the stability of the financial system.
Senator Tina Smith, a Minnesota Democrat, rejected, suggesting that a “dramatic decline” of the value of houses “would be a source of massive instability” in the economy.
“I do not know that this is a problem of financial stability,” said Powell, adding that governments of states and locals would probably intervene to protect a collapse in the housing markets.
However, even if households and the public sector are more exhausting the costs of climate change, some economists doubt that the financial system can remain isolated. A risk channel is the American regional banks, which are strongly exposed to residential real estate.
“Yes, Citi could potentially withdraw from a particular state,” explains Graham Steele, head of the chief cash department on the bank and insurance under Biden. “But we have thousands of community and regional banks that cannot just close their store.”
Economists from Nyu Stern, Rice University and the Federal Reserve Bank of Dallas have found that the increase in insurance premiums caused Higher mortgage crime rate And push owners to accumulate more credit card debts, among other “large -scale training effects” that higher insurance costs may have in the financial sector.
The rise in bonuses encouraged certain owners to reimburse mortgages early, leaving the insurance requirements by reimbursing their loan faster. This suggests that more households “limit their risk sharing with the financial sector,” explains Shan GE, the main author of the study.
Consequently, GE adds: “When a disaster strikes, they are full burden, rather than sharing it with insurance companies and mortgage lenders.”
Insurance companies are designed to take risks, but in many regions of the United States, they abandon the insured because they argue that the company is no longer sufficient.
Insurers generally avoid covering the risks considered too systemic or uncertain to model, inciting governments to intervene. In the past, public-private schemes for threats such as terrorism have transferred part of the taxpayers' risk burden to private investors.
But the design of such a climate change scheme is difficult. Insurance is designed to distribute risks in conditions of uncertainty, but climate change makes extreme times more likely to strike and more damaging when it does.
Julian Enoizi, head of public sector practice at the reinsurance broker Guy Carpenter, says that global warming had made disasters so much more difficult to model that insurers may have a limited appetite for certain risks related to the climate – even if governments have used guarantees to retain them in the most exposed markets.
“The speed at which the frequency and severity (disasters) change means that you can no longer use the past as a proxy for the future,” he said, adding that developing countries, which are the harshest by climate change, often do not have the capital to buy the required insurance levels.
If the financial services retreat from – or have never deeply penetrated – many most affected regions, could this make the financial system away from extreme weather events even if they hit real assets?
Ge is not convinced. “In classic economic models, more risk sharing is better for the financial system,” she says. Finally, “there will be a transfer of pain on the main street to Wall Street's pain”.
Some defenders of banking regulations fear that the proliferation of expert working groups has led to a false feeling that the risks have been properly evaluated. In his Climate scenario analysisThe Fed warned that it was facing large data differences and incomplete information, in particular linked to insurance coverage.
Steele says that despite a multitude of “blue ribbon commissions” devoted to the issue, the major financial institutions had above all succeeded in avoiding the examination of their exposure to climatic risks.
He thinks that the more silent position of the Fed, including recent comments from Powell, was aimed at appeased Trump. “The transmission mechanisms, at this stage, are not mysteries,” he says, warning retirement “is a political thing … And this is how you end up with a crisis. Because the risk is there. It's not going – you just don't talk about it. “
