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Hello from New York.
We start with the news that late yesterday BlackRock quit the Net Zero Asset Managers alliance, leaving State Street as the largest US asset manager in the group. BlackRock’s move follows a flurry of US banks that quit the Net Zero Banking alliance in recent days.
In today’s newsletter we look at the deadly wildfires raging in Los Angeles, and the increasingly urgent problem of how to insure real estate in areas prone to extreme weather.
Insurance risk
As insurers flee California wildfires the housing market takes a hit, study finds
Nearly 180,000 residents were under evacuation order last night as uncontrolled fires burnt tens of thousands of acres across Los Angeles. The fires, which broke out earlier this week, have ripped through parts of the US’s second-most-populous city, and last night the Santa Ana winds were just picking up again.
While wildfires are not new to California, their increasing severity is driving a serious problem for the state’s economy: the dwindling availability of homeowners’ insurance. Early estimates suggest that insurers could face payouts as high as $20bn from the latest fires — even after they’ve moved in recent years to reduce exposure to vulnerable properties in the state, with serious implications for California’s housing market.
A paper published this week found new evidence that homeowners have been moving away from fire-prone areas when insurance companies reduce coverage. In studying the California market, the researchers found that as more insurers refused to offer coverage for high-risk homes, the number of home loan applications declined.
“Decreased insurance availability alters housing demand by signalling increased risk in a particular location,” said the new report, written by researchers from the Federal Home Loan Mortgage Corporation and the Environmental Defense Fund.
California is the US state most affected by wildfires as of 2023, according to the National Interagency Coordination Center. Extreme heat and longer droughts have driven more intense fires, and that has prompted insurance companies to flee.
Last year, State Farm announced it would not renew policies for 72,000 homes and apartments in the state, including 69 per cent of insurance plans in the upscale Pacific Palisades area which was engulfed by the latest wildfires.
The new research paper said that after devastating wildfires in California in 2017 and 2018, insurance companies declined to renew policies on more than 660,000 homes in the following two years.
California is trying to fix the system. At the start of this year, the California Department of Insurance started accepting pre-application petitions from homeowners to more accurately assess their wildfire risks. This move should help insurance companies offer fairer coverage plans.
“This is a pivotal step towards fostering a more resilient community, one that is better prepared to face the escalating threats posed by wildfires,” said Firas Saleh, director for North American wildfire models at Moody’s.
These tailored petitions will encourage homeowners “to adopt fire-resistant building materials, create defensible spaces and implement other risk reduction measures, thereby potentially lowering their insurance costs while enhancing safety”, he said.
The fires are being closely watched by the stock market as well. Edison International, a utility for southern California, saw its shares sink this week. Its shares are down 14 per cent from the start of the year. (US stock markets were closed yesterday for Jimmy Carter’s funeral.)
Analysts at Morgan Stanley were cautiously optimistic that Edison equipment did not start the fires. If the company is found to have been negligent in a way that led to the fire, then it would need to reimburse a state wildlife fund up to $3.9bn, Morgan Stanley said on Wednesday.
As climate change continues to foment extreme weather, insurance companies are eager to pull out of vulnerable markets. In 2023, we reported about insurers abandoning Florida as stronger hurricanes hit the state. (Recall, the state’s chief financial officer tried to blame the problem on insurance companies’ “wokeness”).
Now, the devastation of the Los Angeles wildfires has shown how insurance companies — and the housing market — are increasingly reacting to extreme weather.
Smart reads
Over the line International agencies have confirmed that the world last year breached 1.5C of warming for the first time.
Second thoughts Toyota is rethinking its troubled bet on hydrogen-fuelled cars.
Mineral momentum China’s Zijin Mining is expanding its push into lithium, to increase its exposure to the growth of electric-vehicle sales.
