The battle over a $2.9 trillion climate risk

 

A repaired crack in the walls of a house in the village of Presles-en-Brie, outside Paris, on June 2. Photographer: Cyril Marcilhacy/Bloomberg

 By Claudia Cohen, Gautam Naik, and Tom Fevrier

 Today’s newsletter looks at how subsidence is become a worsening risk due to climate change. Unfortunately for homeowners, insurers don’t want to pick up the tab. 

 

When Bernard Weisse first noticed a tiny crack in the outer wall of his house on the outskirts of Paris, he dismissed it as little more than a nuisance. But in the four years since, a spiderweb of fissures has spread from floor to ceiling and snaked into virtually every corner of his home. 

“We can hear loud cracking noises especially when it’s warm outside,” said the retired salesman and father of three. “Sometimes, I think we should get all our stuff together and leave.” 

Like a growing number of people around the world, Weisse is grappling with subsidence — a term for the sinking land that’s causing damage to homes and other structures built on it. The slow-moving climate disaster has already caused tens of billions in damage and has the potential to affect 1.2 billion people in areas accounting for more than $8 trillion of economic output. 

While groundwater extraction, mining and earthquakes also cause the ground to shift, global warming vastly increases the risks. What happens is that soil swells with winter rain and then shrinks as it dries in the heat, cracking foundations in the process.

Because of its soil and its status as the world’s fastest-warming continent, Europe is particularly exposed. The European Central Bank estimates the region’s potential damage from sinking land at more than €2.5 trillion ($2.9 billion) across all euro-area financial institutions. Although most of that is classified as “low risk,” this summer is forecast to be one of the hottest and driest on the continent, creating perfect conditions for subsidence damage. 

For Weisse, the cost for repairs could climb to as much as €200,000 to keep his two-story home from crumbling. That would be part of the estimated €43 billion in damage that households face by 2050 in France alone, according to insurance trade group France Assureurs. With that much money at stake, it’s set off a battle over who will ultimately have to pay. 

Weisse’s town of Presles-en-Brie has teamed up with 14 nearby villages and sued the state to have their subsidence issues recognized as a natural catastrophe like flash floods and wildfires. That would trigger payments from insurers and the government, powerful opponents for the municipalities.

“It’s David against Goliath,” said Dominique Rodriguez, who’s been mayor of the pastoral community of 2,300 people for more than three decades.

 

So far, the big guys are winning. In Presles-en-Brie, at least 40 homeowners have sought subsidence compensation since 2020, and while two houses were granted CatNat recognition, others were rejected.  

Europe is the epicenter because of its clay-rich soil and relatively high population density. Also, buildings from the 1970s and 80s — when a postwar housing construction boom was still underway — are particularly susceptible.

While Presles-en-Brie is an early victim, the issues are global. Jakarta has sunk more than 2.5 meters (8 feet) in a decade, and Tehran drops as much as 22 centimeters a year. In the US, Houston is most affected, with 40% of the city subsiding more than half a centimeter a year. 

More than 425,000 Dutch houses will be exposed over the next decade, with subsidence already lowering house prices by as much as 5%, according to a recent study by the Tinbergen Institute. Repair costs can exceed €100,000 per home and are rarely covered by insurance. 

“The situation is urgent,” said Karsten Klein, director of advocacy at Vereniging Eigen Huis, a Dutch homeowners association. “Waiting until homes become uninhabitable is not an option.” 

 

Today’s newsletter dives into non-admitted insurers. The lightly-regulated companies are quickly becoming the only option for homeowners facing growing weather risks, even though they lack many of the protections of major insurers.

 

Read more stories from “Uncovered,” our series about how climate change is upending the insurance industry. Part 1 looked at the fragility of US “last resort” insurers. Part 2 explored the risky business of private climate modeling. Part 3 revealed the harsh reality of the catastrophe bond market. Part 4 examined how a first-of-its-kind program in the UK is running out of time. 

The climate cases no insurer wants 

By Sophie Alexander

Jeff and Janie Green thought their ordeal was over after the Glass Fire swept through their Napa Valley neighborhood in 2020 and merely damaged their six-bedroom house. Unlike others in their community, they didn’t lose their home entirely. But soon after, they did lose their insurance.  

“They couldn’t get rid of us fast enough,” Jeff said of his insurer. “Everybody was getting canceled.”

It’s a crisis playing out in a lot of parts of the country, more often than it used to: A monster storm strikes, or massive wildfire hits, and homeowners in the area get dropped by their insurers. Jeff and Janie were left with limited options: either purchase insurance through the state-backed insurer-of-last-resort, or something called a “non-admitted” company. (They did both over the years, eventually landing with a non-admitted company.)

Non-admitted companies are a lightly regulated form of insurance originally designed to protect unique and complicated businesses like fireworks factories. But with climate change intensifying fires and storms, people like the Greens have little other choice than to buy their policies. The industry has effectively decided that their family home in arid California is as risky as a fireworks factory.  

Since 2022, seven of the 12 biggest home insurers in California have limited their coverage in some way. Over that same period, the number of homeowners turning to the non-admitted market has skyrocketed 232%.

A home destroyed by the Glass Fire is seen in St. Helena, California in September 2020. Photographer: David Paul Morris/Bloomberg

 

This is concerning to insurance experts because non-admitted companies lack many of the same protections as their traditional counterparts. The state rigidly dictates contracts and pricing for “admitted” companies. Most importantly, admitted insurers are backed by guaranty plans set up by the state. Meaning no matter what, even if the company fails, it’s guaranteed that customers’ claims will get paid. Non-admitted companies don’t have any of these safeguards. They’re also typically way more expensive. 

“It’s a huge problem,” says Jesse Keenan, associate professor of sustainable real estate and urban planning at Tulane University. “Unless you’re insuring a fireworks factory or a sports stadium or something that’s truly, truly unique, if you’re just talking about a homeowner that lives near a river or something, it’s not good policy to rely on these people.”

In Florida, this is a familiar story. The insurance market never fully recovered after Hurricane Andrew wrecked the state in 1992. That’s when non-admitted companies started stepping in more and working with homeowners. Over the years, the number of non-admitted policies in the state has ebbed and flowed, growing and shrinking depending on the admitted market’s risk appetite at the moment. But, now, non-admitted carriers are a fixture of the market in Florida, especially for big, expensive homes on the coast that are at high risk of destruction.  

Michael Melamud, a Miami-based luxury insurance broker of around three decades, says that since the pandemic, the majority of his customers have policies with non-admitted companies. “Is it popular? No,” he says. “Is it a necessity? Yes.” 

But these days in Florida, the profile of a non-admitted company is changing. Traditionally, most non-admitted policies written in the state were from subsidiaries of big admitted insurers, like AIG, Nationwide or Berkshire Hathaway. Now even those companies are cutting back their non-admitted business. Filling the gap are newer, smaller companies that are, in some cases, less financially sound. The same is true in other nearby states like South Carolina, Mississippi and Alabama. In each of those states, the biggest non-admitted home insurance company is a startup called Orion180. 

Orion180 wasn’t even a fully licensed insurance company until 2022, but now it’s the second biggest non-admitted home insurance company in the country, according to data from S&P Global. But as it has grown quickly, its financials have been rocky enough to trigger inquiry from the regulator in their home state. 

Orion180’s chief executive Ken Gregg says it has since strengthened its financial position and that the regulator didn’t need to take “formal” action. The company is planning on entering Florida’s non-admitted market in January. While this might concern some academics and consumer advocates, Gregg says Orion180 is solving a problem by providing coverage where no one else will. “We’re targeting the high risk areas that people don’t typically want to write in,” Gregg said. “We go to the areas that people are going away from.” 

Read the full story on Bloomberg.com.

--With assistance from Leslie Kaufman

 11 million This is how many people live in California’s high-risk wildfire zones, areas that include Los Angeles county, San Diego and the vineyards of Napa and Sonoma.