The insurance industry is being called out by an international research institution for its progressive attitude on climate change.
A white paper put out by the nonprofit Urban Land Institute this week urges the real estate sector and government planners to take an active role in climate change adaptation.
The report points to the insurance industry as a leader in developing risk standards for natural disasters, and encourages those in real estate and the government to follow suit.
The paper, “What the Real Estate Industry Needs to Know about the Insurance Industry and Climate Change,” draws on data and analysis from Lloyd’s of London and concludes that “accurately priced insurance alone cannot mitigate the effects of climate change on the built environment.”
More investment into resilience infrastructure and reforms in current development practices are also necessary, the report states.
The bottom line, as is pretty much always the bottom line, is money. The report points out that the increasing frequency of extreme weather brought on by climate change adversely affects real estate values.
According to ULI estimates, over the past 10 years direct losses in real estate and infrastructure as a result of natural disasters has tripled to the tune of $150 billion per year.
Sarah Jo Peterson, ULI’s senior director of policy and author of the report, said one of the goals was to alert real estate developers, landowners and planners to the potential of rapidly rising property insurance costs.
“The concern is it won’t be gradual, it will be accelerating,” Peterson said, expressing her fear how the industry will react if premiums begin rising rapidly.
She believes insurance pricing alone will not do enough to motivate developers to give deeper consideration the impacts of extreme weather before building.
“I think the insurance price signal is important, but it’s not everything,” she said. “I think insurance pricing is not going to be enough.”
Aside from worrying over how costlier riskier property will get, the real estate industry should emulate the insurance industry by adopting strategies to better prepare for an unknown climate, according to Peterson.
“I think it’s going to be a reality they have to deal with and I think it’s going to be something they have to manage on their own through risk management,” Peterson said. “I think they need to start thinking like the insurance industry is.”
Embracing data and analytics – and the cold, hard reality that building in risk-prone areas will be costlier in the future – is the first step for the real estate industry.
Collaborative efforts such as those that have been embraced by the insurance industry may be the next step for developers and landowners, Peterson said.
She pointed to collaborations the industry has undertaken as examples for the real estate industry to follow, such as ClimateWise, which is a nonprofit group of more than 40 insurance firms and organizations facilitated by the University of Cambridge Institute for Sustainability Leadership, and the Munich Climate Insurance Initiative, a group of insurers, climate change and adaptation experts, and policy researchers.
The report offers a case of cooperation between developers and a city to build more resilient the report uses a development known as Arverne by the Sea.
The project is a 120-acre planned community on a vacant site located off of the Atlantic Ocean within the Rockaway Peninsula of Queens, N.Y. that was designed for resilience in the face of increasing hurricane risks and rising sea levels.
Developers incorporated resilience to extreme weather into the community’s planning, design, and construction. They ordered 500,000-plus cubic yards of fill to raise the site by an average of 8 feet, they developed a special drainage system to reduce flood risk and used a variety of construction materials and design techniques to beef up the resilience of the buildings, the report notes.
It was half completed when Superstorm Sandy struck the Eastern Seaboard in 2012. While other communities all around it were devastated, Arverne by the Sea weathered Sandy with minimal water and wind damage, the report states.
“Arverne by the Sea is a great case study. It was a partnership between developers and the city – an intellectual partnership,” Peterson said. “By building it to resist rising sea levels and hurricanes they planned for an unknown event and were able to come up with ways to make that development much more resilient to what turned out to be Sandy.”
She added, “Sandy hit and it stood where everything else around took a hit.”
The report highlights steps the insurance industry has taken to adopt risk standards for climate change across the industry, including catastrophe models to insurance products that incentivize risk-reducing building practices.
However, it maintains that the insurance industry’s efforts alone aren’t enough to deal with a future in which property damage from climate change may be extensive.
“The insurance industry is leading,” Peterson said. “I’m not saying they’ve solved all the issues. They’ve been putting in decades of work on this issue. They have been taking this very, very seriously – developing more resources and are continuing to develop new methods.”
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