When Hurricane Francine slammed into Kee Kee Julien-Judson’s southern Louisiana home in September, the real estate agent was already financially underwater from the damage caused by Ida, the tropical storm that hit three years earlier.
The day after Ida had hit, with water still streaming into her house, she had driven several miles to get a phone signal so she could call and make an insurance claim. Despite filing promptly, she says she spent the next year chasing her insurer, and ultimately “fronted the money” to repair her home.
“When my credit cards were kind of high, I said, ‘OK, I’ll just take this out of my savings account, and then when they give me my cheque, I’ll put it back,’” she says. She estimates that her eventual payout fell about $40,000 short.
As a result, when her insurer pushed her annual insurance premium up to nearly $12,000 in the aftermath of Francine, she was left wondering whether to leave Louisiana. But the soaring coverage costs have also depressed the value of her home, which is her main financial asset — leaving her unable to consider a sale.
Storms intensified by climate change are slashing the value of properties in affected areas and straining household finances, with rising insurance premiums contributing to higher credit card borrowing and dragging on economic growth, as families divert scarce savings to cover rebuilding and relocation costs.
Natural disasters caused $320bn in losses last year, according to reinsurer Munich Re, and catastrophes now typically cost the insurance industry more than $100bn every year.
The rising bill left policymakers and regulators concerned that climate change could pose a systemic threat to the financial system.
The US Federal Reserve instructed its supervisors to assess climate-related risks at significant banks in 2020, during the Biden administration, with chair Jay Powell calling climate change an “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 on, the mood has shifted. While some regulators have continued to warn that extreme weather could trigger market panic, others are less convinced that climate change will be systemically significant — particularly since financial institutions have retreated from high-risk areas, shifting costs to governments and individuals.
That was the view Powell expressed in February in testimony to the Senate banking committee. Weeks earlier, and just days before the return of climate change sceptic Donald Trump to the White House, the Fed had withdrawn from the Network for Greening the Financial System, a coalition of central banks studying climate threats.
“If you fast-forward 10 or 15 years, there are going to be regions of the country where you can’t get a mortgage, there won’t be ATMs, the banks won’t have branches,” Powell acknowledged. However, he said, this would primarily threaten consumer access to financial services, rather than financial system stability.
Senator Tina Smith, a Democrat from Minnesota, pushed back, suggesting that a “dramatic decline” in home values “would be a massive source of instability” in the economy.
“I don’t know that it’s a financial stability issue,” Powell responded, adding that state and local governments would likely intervene to protect a collapse in housing markets.
Yet, even as households and the public sector shoulder more of the costs from climate change, some economists doubt the financial system can remain insulated. One risk channel is US regional banks, which are heavily exposed to residential real estate.
“Yes, Citi could potentially pull out of a particular state,” says Graham Steele, a lead Treasury department official on banking and insurance under Biden. “But we have thousands of community and regional banks that can’t just close up shop.”
Economists at NYU Stern, Rice University and the Federal Reserve Bank of Dallas found that rising insurance premiums have prompted higher rates of mortgage delinquency and are pushing homeowners to rack up more credit card debt, among other “far-reaching ripple effects” that higher insurance costs could have on the financial sector.
Surging premiums have encouraged some homeowners to pay off mortgages early, exiting insurance requirements by paying off their loan faster. This suggests that more households are “limiting their risk-sharing with the financial sector,” says Shan Ge, the study’s lead author.
As a result, Ge adds, “when a disaster strikes, they’re bearing the full burden, rather than having it shared with insurance companies and mortgage lenders.”
Insurance companies are built to take on risk but in many parts of the US, they are dropping policyholders because they argue the business is no longer profitable enough.
Insurers generally avoid covering risks seen as too systemic or uncertain to model, prompting governments to step in. In the past, public-private schemes for threats such as terrorism have shifted some of the risk burden from taxpayers to private investors.
But designing such a scheme for climate change is difficult. Insurance is designed to spread risks under conditions of uncertainty, but climate change is making extreme weather more likely to hit, and more damaging when it does.
Julian Enoizi, head of public sector practice at reinsurance broker Guy Carpenter, says that global warming had made catastrophes so much harder to model that insurers might have limited appetite for some climate-linked risks — even if governments used guarantees to entice them back into the most exposed markets.
“The speed at which frequency and severity [of catastrophes] is changing means you can no longer use past as the proxy for future,” he says, adding that developing countries, which are the hardest-hit by climate change, often do not have the capital to buy the required levels of insurance.
If financial services are pulling back from — or have never deeply penetrated — many of the worst-hit regions, could that make the financial system immune to extreme weather events even as they pummel real assets?
Ge is unconvinced. “In classic economic models, more risk-sharing is better for the financial system,” she says. Eventually, “there’s going to be a transfer from Main Street pain to Wall Street pain.”
Some advocates of bank regulation are concerned that the proliferation of expert task forces may have led to a false sense that risks had been adequately evaluated. In its climate scenario analysis, the Fed cautioned that it faced extensive data gaps and incomplete information, particularly related to insurance coverage.
Steele says that despite a multitude of “blue-ribbon commissions” devoted to the issue, large financial institutions had mostly succeeded in their efforts to avoid scrutiny of their exposure to climate risks.
He believes the Fed’s more muted stance, including Powell’s recent comments, was aimed at placating Trump. “The transmission mechanisms, at this point, are not mysteries,” he says, warning the retreat “is a political thing . . . and that’s how you end up with a crisis. Because the risk is out there. It’s not going away — you’re just not talking about it.”