How a billion-dollar insurance industry protects Florida’s homeowners from disaster – for now

The Miami skyline, c2002. Image: Getty.

After dodging the worst of Hurricane Irma, Florida’s coastal real estate boom shows no signs of slowing. In Miami and nearby waterfront cities, a survey of local records show that more than 90 luxury high-rise apartment blocks are under construction or have been completed since 2015, increasingly financed by overseas investors looking for “safe” opportunities in a turbulent global economy.

Yet, since 1886, the Sunshine State has been hit with almost twice as many hurricanes as the next two states, Texas and Louisiana. Currently, 2.4m people and 1.3m homes sit just 1.2 metres above the high tide line and sea levels are expected to rise up to two metres by the end of the century.

What enables Florida’s staggering growth against environmental odds? The answer, in part, comes down to how property insurance protects the state’s real estate against disasters. In 2015, Floridians spent $10.8bn on homeowners’ insurance to protect more than 6m properties. The total insured value protected by the state’s homeowners’ market is a soaring $2.1trn, roughly equal to the annual economic output of India.

I have dedicated the past three years to researching how this massive market works – and whether it can really sustain Florida’s real estate boom in the long run.

From risk to reward

Property insurance balances Florida’s unusually high vulnerability to natural disasters against the growth pressures of the state’s real estate and construction industry. By requiring property insurance to protect loans, US mortgage lenders and investors have created a massive insurance market in Florida – and a costly necessity for property owners.

The global insurance-linked securities (ILS) industry plays an increasingly important part in this story, converting Florida’s hurricane risk into an attractive financial asset class.

The catastrophe bond – the most widely used ILS product – was created after Hurricane Andrew’s Miami landfall devastated Florida’s homeowners’ insurance industry in 1992. “Cat bonds” and other types of “alternative” insurance turn investment capital – from pension funds and other firms – into reinsurance, or insurance for insurers.

A perfect storm? Image: Lilith121/Flickr/creative commons.

Here’s how ILS works: insurance companies send a portion of the premium they collect from property owners to special trust companies in tax-friendly nations such as Bermuda, which then raise money from investors, who agree to repay a given range of losses if disaster strikes. And if not, investors walk away with the property owner’s premium, plus a tidy profit.

This complex financial market provides nearly $90bn of protection worldwide. Large institutions ranging from the World Bank to the Rockefeller Foundation celebrate ILS as a key financial solution to help humanity adapt to climate change, particularly in developing countries.


Meet the specialists

Despite these global prospects, Florida’s hurricane risk continues to be the bread and butter for ILS investors. According to one of the biggest cat bond investors, up to half of the ILS market’s capital is pooled in the Florida homeowners’ market. The concentration of ILS capital in Florida can partly be explained by changes to the homeowners’ insurance market, in the 25 years following Hurricane Andrew.

Once led by national firms offering multiple insurance products, the market is now dominated by smaller firms that specialise in Florida homeowners’ insurance. Unable to spread their risk over a nationwide portfolio of business, these Florida “specialists” have become highly dependent on global reinsurers.

Several Florida specialists have deep relationships with reinsurers, including direct ownership ties and their own private ILS “vehicles”, which enable them to directly transfer billions of dollars of Florida hurricane risk to buyers in dozens of countries.

Ultimately, Wall Street’s growing demand for insurance-based products may be changing the fundamental public purpose of property insurance, from one that aims to protect the wealth of communities, to one that sees insured risk as the fodder for financial speculation. Some experts have pointed out unsettling parallels between these new financial mechanisms and the lending model that led to the 2008 subprime mortgage crisis.

A high price

The rise of ILS capital has made new financial resources available to Florida’s rocky property insurance market. But this service has come at a significant cost to homeowners. Floridians pay the highest homeowners’ insurance rates in the nation, while stagnant wages and skyrocketing house prices make south Florida cities among the most unequal in the country.

The billions of dollars that Floridians spend annually on homeowners’ insurance secures financial protection for those fortunate to be property owners. But it does little to fundamentally change the state’s exceptional exposure to disaster.

Florida’s state officials have taken a limited, piecemeal approach to minimising the state’s vulnerability to sea level rise, while continuing to encourage development in vulnerable areas and directly subsidising the state’s property insurance market.

Miami: alright if you’re wealthy. Image: Sky Noir/Flickr/creative commons.

The prospect of stronger and more destructive hurricanes, along with the potential for higher, risk-adjusted insurance rates, could put a massive strain on the affordability of Florida’s housing market in the future.

What’s more, the flow of global investment capital into Florida’s high-risk homeowners’ insurance sector may actually be making the state more vulnerable to hurricanes, by keeping insurers solvent and real estate markets in motion.

Indeed, Hurricane Irma appears unlikely to significantly upset the dynamics within the Florida homeowners’ insurance or global catastrophe reinsurance markets – even if at least one catastrophe bond may have to pay out. The ratings agency A.M. Best estimates that it would take a $75bn insured loss to do so – up to three times the expected US insured losses for Irma.

The ConversationSo the ultimate limits of the multi-billion-dollar ILS market remain untested. But for now, the storm clouds have cleared, and Florida’s real estate boom continues.

Zac Taylor is a PhD Candidate in Geography at the University of Leeds.

This article was originally published on The Conversation. Read the original article.

 
 
 
 

Where did London’s parakeets come from?

Parakeets in the skies above Wormwood Scrubs, west London. Image: Getty.

Visitors to London’s many green spaces would have to be stubbornly looking at their feet to not see one of the UK’s most exotic birds.  Dubbed “posh pigeons” by unimaginative Londoners, these brilliant green parakeets stand out among the fauna of Northern Europe’s mostly grey cities.

‘Parakeets’ is actually an umbrella term referring to the multiple species, which can now be found in London, Amsterdam, Brussels, Paris and various German cities. By far the most common is the Indian ring-necked parakeet, easily recognisable by the stylish red ring around their neck, a matching red beak and, of course, the loud squawking.

In the last 50 years these migrants from South Asia have arrived and thrived, settling into their own ecological niche. In the UK, London is a particular stronghold, but although they may have originally settled in the leafy streets of Twickenham, the birds can now be found in cities as far north as Glasgow.

The story of how they ended up in London is a matter of some discussion and plenty of myth. One often reported theory is that the capitals’ current population are the descendants of birds that escaped from Shepperton Studios during filming of The African Queen, starring Humphrey Bogart and Katharine Hepburn. Others would tell you that they escaped from Syon Park in the early 1970s, when a piece of debris from a passing plane damaged the aviary and allowed them to escape. This chimes with their original concentration in South West London.
My favourite story by far is that they were released by Jimi Hendrix on Carnaby Street in the late 60s. Bored of London’s grey skyline, he set the little fellas free to liven up the place.

However they got here, from 1970 onwards their numbers boomed. In 1992, 700 birds were recorded in London Bird Report. By 1998, 2,845 were seen in the London Area, and by 2006 the ring-neck parakeet was 15th most sighted bird in London.


Darwin would be proud at how well they adapted to the new environment. Toughened up by the hard Himalayan climate, they handle the cold northern European winters better than most locals. Global warming is often brought up in discussions of the parakeets, but it is certainly only part of the story.
It helps, too, that the birds have a 35 year lifespan and few local predators, enabling them to breed freely.

As with any new species, the debate has raged about whether they are harmful to the ecosystem. Strangely reminiscent of the debate over human migrants, often the birds have often been accused of stealing the homes of the natives. The parakeets do nest in tree cavities also used by jackdaws, owls and woodpeckers – but there is little evidence that native species are being muscled out. 

The also provide a food source for Britain's embattled birds of prey. Owls and peregrine falcons have been know to eat them. Charlie and Tom, two city dwelling falcons monitored by Nathalie Mahieu, often bring back parakeets as food.
Of more concern is the new arrivals’ effect on plants and trees. By 2009 their numbers in the UK had grown so much that they were added to the “general licence” of species, which can be killed without individual permission if they are causing damage.

And Parrotnet, am EU funded research project studying the development of parakeet populations across Europe, has warned of the risk they pose to agriculture. In their native India, the parakeets are known to cause widespread damage to crops. As agriculture develops in the UK in line with warmer climates, crops such as maize, grapes and sunflower will become more popular. In India the birds have been documented as reducing maize crops by 81 per cent.

So the parakeets remain divisive. Environmentalist Tony Juniper has disparagingly described them as “the grey squirrel of the skies”. By contrast, the University of York biologist Chris D. Thomas has argued that the parakeets should be left free to move and breed. He sees those wary of the parakeet boom of “irrational persecution” of the bird.

For good or ill the parakeets are here to stay. As so often with migrants of all kinds, there has been some unease about the impact they have had – but the birds, popular amongst Londoners, certainly add colour to the city. Thriving in the urban environment thousands of miles from their natural habitat, they are a metropolitan bird for Europe’s metropolitan cities. 

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