2023 Fall Issue of Urban Land - 132

When it's no longer possible to get full
coverage with low premiums, there's growing
acknowledgement that something has to
give. " The CRE Finance Council has convened
a group of capital markets, CRE, and insurance
experts to try and sort through this very
significant and rapidly growing problem, " says
Sairah Burki, managing director, head of Regulatory
Affairs & Sustainability, CRE Finance
Council. " We are currently examining key
insurance and climate peril trends, identifying
data needs, and thinking through potential
policy solutions. We hope to present a sort of
menu of solutions and policy considerations in
the coming months. "
One solution would be to take a risk-based
approach both to insurance requirements
and to purchasing. Insurers use catastrophe
models to set their pricing for hazards such as
hurricanes, factoring in the probability of an
event at an asset based on its location, as well
as the amount of expected damage and business
interruption based on multiple characteristics,
including occupancy type, construction
type, and elevation, among others. Coverage
for a 1-in-1,000-year wind storm event, or one
with a 0.1 percent chance of happening in a
given year, would reduce owners' premiums
significantly compared to coverage for full
replacement cost.
And there's still ample room for negotiation
between a 1-in-1,000-year event and full
replacement cost. If lenders become more
comfortable with this approach to insurance
requirements, owners will face less cash
flow risk from insurance cost. Lombardo also
underscores that this approach would " fix the
supply and demand issues in states like Florida.
If folks stop buying insurance they don't
need, there's more insurance to go around. "
As catastrophe modelers increasingly offer
climate-conditioned catastrophe models, this
approach better accounts for increasingly
volatile conditions. Currently some states prohibit
the use of catastrophe models for certain
hazards, such as wildfires in California.
Owners can negotiate with lenders on
insurance requirements and can look toward
alternative sources of capital. For example,
insurance-linked securities, such as public
catastrophe bonds, provide (re)insurance capital
from the public markets. Unlike traditional
insurers, capital market investors have only a
small sliver of their portfolio in catastrophe
bonds, so they're not holding too much risk
from catastrophe insurance. After Hurricane
Sandy, the New York Metropolitan Transportation
Authority turned to the capital markets
for insurance and issued a parametric catastrophe
bond to cover risk from storm surge.
Elevating resilience and its ability to reduce
risks across the market offers another potential
solution. For example, last fall California's
insurance regulator mandated that insurance
companies offer premium discounts for policy
owners who implement certain risk reduction
measures. Some state programs also provide
grants or tax credits to offset certain resilience
measures. Although many incentives
focus on residential properties, several states
Figure 4. Median insurance premium by year for retail properties grouped by their
hurricane risk
Sources: Moody's Analytics CRE, Moody's RMS
132
URBAN LAND FALL 2023
2023 Fall Issue of Urban Land

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