Insurance and risk transfer

Extreme weather disasters — made larger, longer, and more intense by climate change — are taking an heavier toll on the possession that many Americans consider to be their most important asset: the home.

Understanding climate risk in the housing market is essential, as these challenges not only affect residential safety but also influence property values, insurance costs, and overall market stability.

Buying a house is one of the most high-stakes decisions many people will make in their lives. Yet many households are investing millions without an adequate understanding of a property’s exposure to growing climate risks.

Recalling the events of 20 years ago, Katrina first made landfall on the southeast Florida coast on August 25, 2005, then moved northwest and rapidly intensified in the warm waters of the Gulf to reach Category 5 strength on August 28.

California has just taken a novel approach to the insurance problem. There, insurers are now permitted to use forward-looking computer models of climate change and disasters when setting premiums – as long as they expand coverage in higher-risk areas.

Climate-related risks are increasingly recognised as an important threat to long-term fiscal sustainability. This column studies the extent to which credit rating agencies integrate these risks into their sovereign rating assessments.

Insurers are raising rates. State officials are pressing back. And scientists say that researching this “underappreciated peril” is critical.