Can You Afford to Insure Your Retirement Dream?
Insurers are bailing out of high-risk areas and raising premiums nationwide
Bob and Kim McIninch had a different kind of sticker shock when they made their last move: the premium for their homeowners insurance actually went down. In Florida.
The Rust Belt transplants have made Florida's Gulf Coast their home for the past 11 years, first settling on Longboat Key, a barrier island that separates Sarasota Bay from open water. But early this year, Bob, aged 60, and Kim, 59, decided to find a place that offered a bit more protection against tropical storms and rising sea levels.
"Right when we sold the place, we got a letter from our insurance agency saying they were no longer insuring (those) buildings," Bob recalls. "That's where it becomes a problem, and so we learned a lesson there."
"It was a conscious decision to find a place that is not in a flood zone — with a view."
The lesson was how and where a home is built makes a big difference, not only to how much commercial insurers will charge to insure the property but whether they will even insure it at all. Bob and Kim didn't have to go far.
Rather than being exposed on a barrier island, their new condo is on the mainland, in a concrete building, 100 feet from the bay at about 12 feet above sea level and two miles from the Gulf itself. Surprisingly, Bob says they're not even required to carry flood insurance.
Built to Last
"It was a conscious decision," recalls Kim, "to find a place that is not in a flood zone — with a view. They're putting in a new break wall that's two feet higher than the last one. This was our mission."
"It could get flooded, there could be roof damage, things could happen."
"It could get flooded, there could be roof damage, things could happen," Bob concedes. "But that's really the thing that makes the difference, is how the building is built. There are other areas that aren't even close to the water that are floodplains just based on their elevation, but we are not, so that was another good thing."
Ironically, their old neighborhood now stands as a kind of buffer against hurricanes sweeping in off the Gulf. Although their new condo's value is 26% more than their Longboat Key townhouse, Bob says their insurance premium is more than a third less, even though they only moved across Sarasota Bay. Kim, whose paintings can sell for thousands of dollars apiece, keeps her canvases in a concrete storage facility.
"It seems like we're with people of like mind and close to downtown and two miles from the beach, says Kim. "So it's all good."
Increasingly Wary Insurers
For now, at least. But in Florida's greater insurance market, it's far from all good. Insurers are becoming increasingly wary of writing policies in states that carry the highest risk from climate impacts. They're cutting back and, in some cases, pulling out altogether.
Among Florida homeowners who report recent changes in their coverage, 12% were dropped altogether by their insurers, according to a survey by the real estate firm Redfin. The study, conducted in February, found that, "nearly three-quarters (70.3%) of Florida homeowners and roughly half (51%) of California homeowners say they or the area they live in has been affected by rising home insurance costs or changes in coverage (such as having their insurer drop them) in the past year. That compares with less than half (45%) of homeowners nationwide."
Redfin also reported that "11 insurers have liquidated amid growing flood and storm risk," in Florida.
'Mispriced' Properties
Susan Crawford, a Harvard law professor and author of an insightful book on the flood risk facing Charleston, South Carolina, says the recent Florida real estate boom notwithstanding, the emerging insurance crisis is the leading edge of a storm that will begin to erode real estate markets in the most vulnerable areas.
"This will affect middle-class people whose wealth is invested in their houses enormously."
"Not just because individual families stop being able to pay insurance," she predicts, "but because the entire real estate market in a particular residential area learns that these houses are insurable only at a fantastic price," and when that information seeps into the knowledge of people buying homes . . . then those homes swiftly lose value."
Crawford is not alone in her angst. The head of the world's second largest reinsurance company — those that insure retail insurers against losses — recently said property insurance premiums will have to rise even further to "encourage risk aversion."
Swiss Re chairman Jacques de Vaucleroy told Bloomberg News that, "There is not a lot of action yet, not enough," meaning that premiums still aren't high enough to discourage buyers of risky properties. That's not a sunny prospect in the Sunshine State, where homeowners already pay four times the national average to cover their homes.
A 'Spiral of Bad Events'
In other words, insurance could be the force that finally triggers a massive retreat inland due to climate breakdown and falling property values. Most homebuyers need to finance their homes and you can't get a mortgage without insurance. But the wave will eventually wash over even those who own their homes outright.
"We've got $200 billion in mispriced coastal real estate, the real estate for which the risk of sea level rise has not been priced in."
"This will affect middle-class people whose wealth is invested in their houses enormously," predicts Crawford, who tracks developments in her email newsletter, "Moving Day."
"Say you have a $350,000 house and that that is your nest egg. That was your retirement, and you love living without a mortgage, and you love the weather, but the risk is that that investment will be wiped out and you either won't have insurance or won't be able to get insurance that will shield you from a spiral of bad events."
Among respondents to Redfin's survey in Florida who planned a move within the next year, nearly 12% cited soaring insurance costs among their reasons. That's about double the national average. "We've got $200 billion in mispriced coastal real estate," says Crawford, "the real estate for which the risk of sea level rise has not been priced in."
Coastal Land Will Vanish
Recent credible projections suggest that within the next two-to-three decades, millions of acres of coastal properties will slip below the tide line along U.S. coasts, especially in the Southeast.
High-risk states like Florida and California have created state-sponsored insurers of last resort, for those who can't get or afford commercial coverage. But as more and more homeowners are forced into those programs, there are serious questions of whether the state insurance pools can weather future "claim storms" themselves. Taxpayers may ultimately share the burden with policyholders.
In a recent missive, Crawford took aim at the Florida Keys, where local officials and developers have been pushing back hard at attempts to control high-risk development and make the community more resilient.
"It's even more expensive to continue to act the way we have been," says Crawford, the Harvard professor, "which is to have a disaster happen and then the federal government just flings billions of dollars — without a whole lot of planning — at the disaster."
In California, where increasingly intense wildfires bring with them the double jeopardy of seasonal flooding and landslides, 13% of people who intend to relocate within the year cited concern for natural disasters or climate risks as a reason, compared with fewer than 9% nationwide.
A Pocketbook Issue
"It's becoming more a topic of conversation because it's coming at us through our pocketbooks," says Joe DiStefano, CEO of UrbanFootprint, a Berkeley, California-based data firm that advises cities on climate risk and resilience strategies. He says the top five insurers no longer write new policies in California, and that's getting people's attention.
"You may not have an income tax but you're paying $12,000 a year for insurance."
"Whether somebody is specifically concerned with climate risk or not, they tend to become more interested in climate risk when they see an insurance premium go up by 50% (which recently happened to him) or they get non-renewed," he says.
DiStefano, 51, thinks of the tightening insurance crunch as a kind of hidden climate tax, a paradox in a place like Florida, which is widely considered a tax haven. "You may not have an income tax but you're paying $12,000 a year for insurance," he says.
Back in Florida, there's some evidence that real estate markets are already feeling the squeeze.
Redfin reports that listings of Florida condos for sale are "skyrocketing" in part because of insurance rates. "In addition to slowing demand," it adds, "the rising cost of insurance and fees are pushing prices down."
Many older homeowners believe the worst effects of the shifting climate will set in after they die. "I think we all feel like what's going to happen is going to happen, and it's probably going to happen not in five years or 10 years, but (to) our children's children," says Kim McIninch, who has adult children living in the Northeast but no grandchildren.
Southern Sangfroid
"We're living a lifestyle we enjoy and our home values are not decreasing because of it," she notes. "It's certainly something that we need to think about, but probably not in my lifetime."
Many local planning authorities would appear to share that view.
"It's really astonishing to me how little we've done as a country to plan for our future," says Crawford, who says it will take sweeping changes and coordination at the state, local and national level to turn things around.
"People say, 'Look, we just can't move. It's just too expensive,' " Crawford acknowledges. "But the thing is, there will be moving. It'll be chaotic and painful for most people, but it will happen. We have an opportunity to plan ahead so it's not chaotic and painful."
See where you stand
Climate Central, a non-profit climate research organization based in Princeton, New Jersey, offers a Coastal Risk Screening Tool, where you can see the progression of encroaching seas in your area. The National Oceanic and Atmospheric Administration and others offer similar interactive tools.
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