Why Do We Encourage Americans to Move to Disaster Zones?

See We Have to Stop Underwriting People Who Move to Climate Danger Zones by Parinitha R. Sastry and Ishita Sen. Dr. Sastry is an assistant professor of finance at Columbia Business School. Dr. Sen is an assistant professor of finance at Harvard Business School. From the NY Times.

Excerpts:

"there are few signs that policymakers and regulators are grappling with the decisions that brought so many people into high- risk areas to begin with. Their refusal to do so sets the stage for an even bigger, potentially deadlier and more expensive disaster down the line.

Financial markets, if left to their own devices, would naturally force Americans to confront the ugly realities of our changing climate and deter them from flocking to places where human habitation is increasingly untenable. Unfortunately, this basic system of supply and demand has been stymied by regional and federal policies — policies supported by both Democratic and Republican lawmakers in both blue and red states who buckle under the short-term political pressure to keep home insurance premiums artificially low."

"In theory, insurance prices quantify the risks of living in a certain place. Of course it should be more expensive to insure a home in an area buffeted by disaster. But in practice, states vary widely in their willingness to allow insurance premiums to increase, with some making it far harder than others for insurers to raise prices. California is one of the most resistant, and until recently refused to let insurers raise premiums or reflect climate-catastrophe risks in their pricing.

Insurers doing business in such heavily regulated states, finding themselves unable to raise premiums when needed, wind up shifting some of the costs to homeowners who happen to live in states that are more accommodating to premium increases. That is, in part, how middle-class communities, such as Enid, Okla., can end up subsidizing the owners of million-dollar houses in Malibu. And under our current regulatory regime, that dynamic is only expected to strengthen as climate losses continue to cut into insurance companies’ bottom line."

"Home insurance is just one way our financial system encourages Americans to move to flood-prone sections of Florida or parched, air-conditioning-dependent Arizona. The government mortgage giants Fannie Mae and Freddie Mac, which guarantee about 70 percent of mortgages on single-family homes, charge the same fees regardless of climate risk. Nobody intends to move into harm’s way. Many people settle in places like Texas because housing is generally more affordable. But that affordability is a mirage: Their mortgage and insurance risks are being subsidized by everyone else. This system, and the continual building in risky areas, portends ever-rising disaster losses."

"Regulators can and should monitor insurers so they don’t use their market power to charge excessive rates. But we are at the other extreme in many high-risk areas: At some point, regulators will have to allow prices to go up so insurers remain solvent and private insurance stays available, even in places hard hit by climate change. The longer they delay, the larger and more disruptive the price increases will be."

"For state and federal policymakers, the question they must face is not whether we should move to insurance pricing that reflects risks, but how.

The federal flood insurance program can point to an approach. From 2021 to 2023, the program phased in risk-based pricing. Policies for new customers were adjusted first. Existing customers in high-risk areas have a much longer adjustment period. This gives households information and time to adjust to the new pricing regime."