FHFA hosted its Fall 2023 Econ Summit on October 3, 2023, with a focus on climate risk. Following opening remarks by Director Sandra L. Thompson, research panels addressed three climate change topics especially pertinent to housing finance: climate change and insurance; land use regulations, disclosures, and risk modeling; and disaster risk and house prices.1 The analysis and conclusions presented during the panels are those of the authors alone and should not be represented or interpreted as conveying an official FHFA position, policy, analysis, opinion, or endorsement.
In the first session, speakers discussed the pros and cons of different approaches to measuring climate risk exposure for insurers and their insured properties. One presenter, Hyeyoon Jung (Federal Reserve Bank of New York), introduced new measures of forward-looking physical risks faced by insurers and used these measures to assess the resilience of insurance companies to climate risk. The New York Fed’s staff findings indicate a positive association between larger exposures to states with a higher level of natural disaster risk and higher holdings of carbon-intensive assets with higher sensitivity to physical and transition risk, respectively.2 Next, Ishita Sen (Harvard Business School) provided analysis that insurance prices were disjoint from the underlying risks faced due to climate change.3 She stated that there were two responsible forces:
- Insurers have limited ability to change rates in a subset of states and, therefore, rates had not adequately adjusted in response to loss growth.
- Insurers are more likely to raise rates in less regulated states relative to ones more highly regulated, which led to rates outpacing the growth in losses in less regulated states.
Other speakers provided historical retrospectives on hazard insurance. Penny Liao (Resources for the Future) offered lessons learned from flood insurance for wildfires and noted that insuring against natural disasters is difficult because there tend to be many simultaneous losses from a single event, known as correlated risks. These correlated risks, according to Dr. Liao, are magnified by climate change which leads to more frequent and more severe natural disasters over time. Similarly, Katherine Wagner (University of British Columbia) discussed historical natural disaster insurance policy and its present challenges.4 Dr. Wagner noted that the divergence between risk and premiums in natural disaster insurance markets has created uncertainty about the future solvency of insurers and the ability of homeowners to insure themselves against its effects. Because natural disaster risk, unlike other commonly insured risks, incurs losses both large in terms of economic magnitude and spatial correlation, Dr. Wagner stated it is unclear that solutions for other, more commonly studied insurance markets will work for natural disaster insurance.
In the second session, speakers discussed the extent to which Special Flood Hazard Area (SFHA) designations were associated with flood risk and housing development, and whether disclosure policies might better facilitate homeowners’ voluntary adaptation to climate risk. Douglas Noonan (Purdue University) discussed flood zoning policies and residential housing characteristics.5 By examining housing on either side of 100-year floodplain boundaries, Dr. Noonan and his colleagues found that flood risk and housing characteristics were relatively the same on either side of SFHA boundaries.6 They stated that the role of supply constraints accompanying floodplain designations is particularly important for informing flood management and policy. Next, Seunghoon Lee (University of Missouri) shared insights on the effect of disclosure policies on flood risk exposure. Dr. Lee found that disclosure requirements led to a drop in property prices, population, and the probability of experiencing damage from small or moderate floods.7 George Krivorotov (Office of the Comptroller of the Currency) concluded the session with insights on climate risk modeling and noted that renewable subsidies were less effective at reducing activity in carbon-intense sectors.8
In the third session, speakers discussed how house prices might respond after changes in perceived risk and following disaster events, both in the short-term and long-term, and how disaster events such as extreme wildfires might affect household economic and financial well-being. First, Travis LaHue (Federal Energy Regulatory Commission) discussed how flood risk policies affected housing values, providing findings of his analysis of house price discount effects that were almost twice as large as the net present value of the insurance premium due to increases in perceived risk.9 Second, Hoanh Le (South Dakota State University) contributed to the active debate regarding house price recovery after hurricanes.10 This research found that there was no persistent penalty for damaged floodplain properties, the initial drop in house prices was largely driven by direct damage, the rebound in house prices was explained by renovations and rebuilding, and the extent of spending on renovating and rebuilding was associated with the extent of the damage.11 Next, Sean An (Federal Reserve Bank Philadelphia) discussed the effect of wildfires on financial outcomes. His research found elevated spending, indebtedness, and loan delinquencies among households distant from wildfire burn perimeters but exposed to high levels of wildfire-attributed smoke in the air.12 To conclude, Justin Contat (FHFA) discussed measuring home prices following disasters.13 Dr. Contat discussed the difficulties of assessing home values immediately after a disaster due to a lack of comparable properties, changes in risk perceptions and other supply and demand factors, a lack of granular damages data, and a lack of suitable control groups. He then explored potential solutions using recent advances in quasi-experimental methods.
This event was well-attended with nearly 100 in-person attendees and 180 virtual attendees. There were guests from FHFA, other federal agencies, industry, and academia.
At FHFA, we recognize that the issues posed by climate change are cross-cutting. We are monitoring the risks posed by climate change and are actively collaborating with our interagency partners to evaluate the implications of climate risk for the safety, soundness, and mission achievement of our regulated entities. We will continue to host similar public forums to facilitate constructive discussions among industry leaders, key stakeholders, and academic researchers. Our hope is that, through continued discussions and engagement, we will improve the understanding of these topics to enhance the resiliency of the housing finance sector to climate-related financial risk.
1 Documents from this event and for the footnotes below are provided on the FHFA Fall Econ Summit webpage.
2 Jung, Hyeyoon, Robert Engle, Shan Ge, and Xuran Zeng, “Measuring the Climate Risk Exposure of Insurers,” Federal Reserve Bank of New York Staff Reports, no. 1066, July 2023.
3 Oh, Sangmin S., Ishita Sen, Ana-Maria Tenekedjieva, “Pricing of Climate Risk Insurance: Regulation and Cross-Subsidies,” 2022.
4 Marcoux, Kendra, Katherine R. H. Wagner “Fifty Years of U.S. Natural Disaster Insurance Policy,” CESifo Working Papers, 2022.
5 Noonan, Douglas, Lilliard Richardson, and Pin Sun, “Flood Zoning Policies and Residential Housing Characteristics in Texas,” 2022.
6 It is important to caveat these findings by noting that the authors used tax assessor data, rather than true sales prices; tax assessors’ valuations do not tend to incorporate local market dynamics and perhaps not flood risk, either.
7 Lee, Seunghoon, “Adapting to Natural Disasters through Better Information: Evidence from the Home Seller Disclosure Requirement,” MIT Center for Real Estate Research, no. 21/17, 2022.
8 Krivorotov, George, “Sectoral Transition Risk in an Environmentally Extended Production Network Model,” 2022.
9 Lahue, Travis, “Analyzing the impact of changes in flood risk on housing value: evidence from a coastal county,” 2022.
10 This paper is part of a much larger body of literature examining how housing prices change following disasters. Virtually all studies on this topic show that house prices immediately drop. However, there has been a divergence in the literature, as some papers have found a permanent house price decline after hurricanes (Ortega and Taspinar 2018; Gibson and Mullins 2020). Other papers, like Le, have found only a temporary decline (Atreya, Ferreira, and Kriesel 2013; Atreya and Ferreira 2015; Zhang and Leonard 2018).
11 Le, Hoanh, “Damage vs. Risk Perception: Why Do House Prices Recover After Hurricanes?” 2023.
12 An, Xudong, Stuart A. Gabriel, and Nitzan Tzur-Ilan, “The Effects of Extreme Wildfire and Smoke Events on Household Financial Outcomes,” UCLA Anderson School of Management Working Paper, 2023.
13 Contat, Justin, “How Should we Measure Home Prices After Natural Disasters?” 2023.
Tagged: Climate Risk; climate change; Insurance; Land Use Regulations; Risk Modeling; Disaster Risk; House Prices
By: November Wilson
Senior Economist, Climate Change and ESG Branch
Division of Research and Statistics