Posted March 11, 2020
Insurance remains the primary tool for managing climate-related risk. But for how long?
Despite indications that real estate asset managers and investors have begun taking steps to manage climate uncertainties more proactively, as reported in the Climate Risk and Real Estate Investment Decision-Making report from ULI and Heitman, interviews conducted with leading industry figures over the past four years reveal that the sector continues to rely primarily on property insurance policies to manage its climate-related risk from year to year.
In addition to the risk of physical damage to properties, the ULI/Heitman report noted that risks of rising capital and operational costs as well as asset devaluation are among several climate-related drivers of the real estate sector’s future performance. To manage such risks, managers and investors alike are leveraging new forms of asset- and portfolio-level risk mapping, developing new reporting standards in line with emerging climate-related disclosure frameworks, and considering ways to invest in new and existing holdings in ways that mitigate their financial exposure to disaster losses.
“It’s understandable that reinsurers are leading the conversation, but maybe the real estate sector needs to be driving the conversation a little more,” says Daniel Stander, who leads the resilience practice at Silicon Valley–based Risk Management Solutions (RMS), a firm that pioneered catastrophe risk modeling in the late 1980s.
One reason for greater involvement by real estate experts is that in the future, property insurance may not be economical—or even available—in high-hazard real estate markets. Will South Florida property be insurable in 20 years’ time, for example? If insurance is unaffordable or, worse, unavailable, what would happen to the fundamentals of a market?
Stander sees another reason for the real estate sector to act: opportunity. By better quantifying and managing their climate-related risk, asset managers and investors ultimately will improve their performance.
Seek First to Understand
Reinsurers have long used third-party catastrophe models from vendors like RMS to price environmental uncertainties. These models provide probabilistic estimates of expected catastrophic losses for a given portfolio of assets against a wide range of potential events.