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.

 
 
 
 

12 things we learned by reading every single National Rail timetable

Some departure boards, yesterday. Image: flickr.com/photos/joshtechfission/ CC-BY-SA

A couple of weeks ago, someone on Twitter asked CityMetric’s editor about the longest possible UK train journey where the stations are all in progressive alphabetical order. Various people made suggestions, but I was intrigued as to what that definitive answer was. Helpfully, National Rail provides a 3,717 page document containing every single timetable in the country, so I got reading!

(Well, actually I let my computer read the raw data in a file provided by ATOC, the Association of Train Operating Companies. Apparently this ‘requires a good level of computer skills’, so I guess I can put that on my CV now.)

Here’s what I learned:

1) The record for stops in progressive alphabetical order within a single journey is: 10

The winner is the weekday 7.42am Arriva Trains Wales service from Bridgend to Aberdare, which stops at the following stations in sequence:

  • Barry, Barry Docks, Cadoxton, Cardiff Central, Cardiff Queen Street, Cathays, Llandaf, Radyr, Taffs Well, Trefforest

The second longest sequence possible – 8 – overlaps with this. It’s the 22:46pm from Cardiff Central to Treherbert, although at present it’s only scheduled to run from 9-12 April, so you’d better book now to avoid the rush. 

  • Cardiff Central, Cardiff Queen Street, Cathays, Llandaf, Radyr, Taffs Well, Trefforest, Trehafod

Not quite sure what you’ll actually be able to do when you get to Trehafod at half eleven. Maybe the Welsh Mining Experience at Rhondda Heritage Park could arrange a special late night event to celebrate.

Just one of the things that you probably won't be able to see in Trehafod. Image: Wikimedia/FruitMonkey.

There are 15 possible runs of 7 stations. They include:

  • Berwick Upon Tweed, Dunbar, Edinburgh, Haymarket, Inverkeithing, Kirkcaldy, Leuchars
  • Bidston, Birkenhead North, Birkenhead Park, Conway Park, Hamilton Square, James Street, Moorfields
  • Bedford, Flitwick, Harlington, Leagrave, Luton, St Albans City, St Pancras International

There is a chance for a bit of CONTROVERSY with the last one, as you could argue that the final station is actually called London St Pancras. But St Pancras International the ATOC data calls it, so if you disagree you should ring them up and shout very loudly about it, I bet they love it when stuff like that happens.

Alphabetical train journeys not exciting enough for you?

2) The longest sequence of stations with alliterative names: 5

There are two ways to do this:

  • Ladywell, Lewisham, London Bridge, London Waterloo (East), London Charing Cross – a sequence which is the end/beginning of a couple of routes in South East London.
  • Mills Hill, Moston, Manchester Victoria, Manchester Oxford Road, Manchester Piccadilly – from the middle of the Leeds-Manchester Airport route.

There are 20 ways to get a sequence of 4, and 117 for a sequence of 3, but there are no train stations in the UK beginning with Z so shut up you at the back there.

3) The longest sequence of stations with names of increasing length: 7

Two of these:

  • York, Leeds, Batley, Dewsbury, Huddersfield, Manchester Victoria, Manchester Oxford Road
  • Lewes, Glynde, Berwick, Polegate, Eastbourne, Hampden Park, Pevensey & Westham

4) The greatest number of stations you can stop at without changing trains: 50

On a veeeeery slow service that calls at every stop between Crewe and Cardiff Central over the course of 6hr20. Faster, albeit less comprehensive, trains are available.

But if you’re looking for a really long journey, that’s got nothing on:

5) The longest journey you can take on a single National Rail service: 13 hours and 58 minutes.

A sleeper service that leaves Inverness at 7.17pm, and arrives at London Euston at 9.15am the next morning. Curiously, the ATOC data appears to claim that it stops at Wembley European Freight Operations Centre, though sadly the National Rail website makes no mention of this once in a lifetime opportunity.

6) The shortest journey you can take on a National Rail service without getting off en route: 2 minutes.

Starting at Wrexham Central, and taking you all the way to Wrexham General, this service is in place for a few days in the last week of March.

7) The shortest complete journey as the crow flies: 0 miles

Because the origin station is the same as the terminating station, i.e. the journey is on a loop.

8) The longest unbroken journey as the crow flies: 505 miles

Taking you all the way from Aberdeen to Penzance – although opportunities to make it have become rarer. The only direct service in the current timetable departs at 8.20am on Saturday 24 March. It stops at 46 stations and takes 13 hours 20 minutes. Thankfully, a trolley service is available.

9) The shortest station names on the network have just 3 letters

Ash, Ayr, Ely, Lee, Lye, Ore, Par, Rye, Wem, and Wye.

There’s also I.B.M., serving an industrial site formerly owned by the tech firm, but the ATOC data includes those full stops so it's not quite as short. Compute that, Deep Blue, you chess twat.

10) The longest station name has 33 letters excluding spaces

Okay, I cheated on this and Googled it – the ATOC data only has space for 26 characters. But for completeness’ sake: it’s Rhoose Cardiff International Airport, with 33 letters.

No, I’m not counting that other, more infamous Welsh one, because it’s listed in the database as Llanfairpwll, which is what it is actually called.

 

This sign is a lie. Image: Cyberinsekt.

11) The highest platform number on the National Rail network is 22

Well, the highest platform number at which anything is currently scheduled to stop at, at least.

12) if yoU gAze lOng into an abYss the abySs alSo gazEs into yOu

Image: author's own.

“For I have seen God face to face, and my life is preserved”, said Thomas.

Ed Jefferson works for the internet and tweets as @edjeff.

Want more of this stuff? Follow CityMetric on Twitter or Facebook.