Climate Risk Takes Center Stage at FHFA Forum

The Federal Housing Finance Agency (FHFA) recently wrapped up its Fall 2023 Econ Summit, an event held in Washington, D.C. spotlighting climate risk. This event was well-attended, with nearly 100 in-person attendees, and 180 virtual attendees.

The day featured discussions led by FHFA leadership, featuring the top minds in the industry sharing their insight across a broad range of panels, including, Climate Change and Insurance; Land Use Regulations, Disclosures, and Risk Modeling; and Disaster Risk and House Prices.

Following opening remarks by FHFA Director Sandra L. Thompson, the Climate Change and Insurance panel kicked things off, where speakers discussed the pros and cons of different approaches to measuring climate risk exposure for insurers and their insured properties.

Tackling the topic of “Measuring the Climate Risk Exposure of Insurers” were Authors Hyeyoon Jung of the Federal Reserve Bank of New York; and Robert Engle, Shan Ge, and Xuran Zeng from New York University, who engaged in a lively discussion led by Lynn Conell-Price, Economist with the Consumer Financial Protection Bureau (CFPB).

Jung, representing the Federal Reserve Bank of New York, discussed new measures of forward-looking physical risks faced by insurers and used these measures to assess the resilience of insurance companies to climate risk. The New York Fed’s staff findings indicated a positive association between larger exposures to states with a higher level of natural disaster risk and higher holdings of carbon-intensive assets with higher sensitivity to physical and transition risk, respectively.

The second discussion, “Fifty Years of U.S. Natural Disaster Insurance Policy,” was led by Caroline Hopkins, Senior Economist in the FHFA's Office of Capital Policy, and featured Authors Kendra Marcoux, University of California-Berkeley; and Katherine Wagner of the University of British Columbia.

Wagner discussed historical natural disaster insurance policy and its present challenges, noting that the divergence between risk and premiums in natural disaster insurance markets has created uncertainty about the future solvency of insurers and the ability of homeowners to insure themselves against its effects. Because natural disaster risk, unlike other commonly insured risks, incurs losses both large in terms of economic magnitude and spatial correlation, Wagner stated it is unclear that solutions for other, more commonly studied insurance markets will work for natural disaster insurance.

Up next was the discussion focused on “Lessons Learned from Flood Insurance for Wildfires,” led by Mallick Hossain, Financial Economist for the Federal Reserve Bank of Philadelphia, Authors Penny Liao, Len Shabman, and Matthew Wibbenmayer from Resources for the Future

Liao offered lessons learned from flood insurance for wildfires and noted that insuring against natural disasters is difficult because there tend to be many simultaneous losses from a single event, known as correlated risks. These correlated risks, according to Liao, are magnified by climate change, which leads to more frequent and more severe natural disasters over time.

Up next was the presentation on “Pricing of Climate Risk Insurance: Regulation and Cross-Subsidies,” led by Joakim Weill, Climate Economist with the Federal Reserve Board, and featuring Authors Sangmin Oh from the University of Chicago; Ishita Sen from Harvard Business School; and Ana-Maria Tenekedijeva from the Federal Reserve Board.

Sen, Assistant Professor of Business Administration for Harvard Business School, provided analysis that insurance prices were disjoint from the underlying risks faced due to climate change. She stated that there were two responsible forces:

• Insurers have limited ability to change rates in a subset of states and, therefore, rates had not adequately adjusted in response to loss growth.
• Insurers are more likely to raise rates in less regulated states relative to ones more highly regulated, which led to rates outpacing the growth in losses in less regulated states.

Session two focused on “Land Use Regulations, Disclosures, and Risk Modeling,” and kicked off with the topic of “Flood Zoning Policies and Residential Housing Characteristics in Texas,” led by Elise Breshears, Economist with the Environmental Protection Agency (EPA), and featuring Authors Douglas Noonan from Purdue University; and Lilliard Richardson and Pin Sun from Pennsylvania State University.

Noonan, a Professor at Purdue University, discussed flood zoning policies and residential housing characteristics. Through an examination of housing on either side of 100-year floodplain boundaries, Noonan and his colleagues found that flood risk and housing characteristics were relatively the same on either side of Special Flood Hazard Area (SFHA) boundaries. The authors stated that the role of supply constraints accompanying floodplain designations is particularly important for informing flood management and policy.

Next up was the session titled, “Adapting to Natural Disasters through Better Information: Evidence From the Home Seller Disclosure Requirement,” led by Margaret Walls, Senior Fellow and Director, Climate Risks and Resilience Program and Director of the Environmental Justice Initiative from Resources for the Future, featuring a presentation by Seunghoon Lee, Assistant Professor at the College of Arts and Science in Economics for the University of Missouri-Columbia, shared his insights on the effect of disclosure policies on flood risk exposure. Lee found that disclosure requirements led to a drop in property prices, population, and the probability of experiencing damage from small or moderate floods.

Closing out the second session, Esther Shears, Ph.D. Candidate at the University of California-Berkeley Energy and Resources Group, led the discussion on “Sectoral Transition Risk in an Environmentally-Extended Production Network Model.” Authors George Krivorotov, Senior Financial Economist in the Retail Credit Risk Analysis Division within Supervision Risk & Analysis of the Office of the Comptroller of the Currency (OCC), shared his insights on climate risk modeling, noting that renewable subsidies were less effective at reducing activity in carbon-intense sectors.

The final panel discussion of the day, “Disaster Risk and House Prices,” speakers discussed how house prices might respond after changes in perceived risk and following disaster events, both in the short-term and long-term, and how disaster events such as extreme wildfires might affect household economic and financial well-being.

Alexandra Marr, Senior Economist with the FHFA presented Travis LaHue, Economist in the Office of Energy Market Regulation with the Federal Energy Regulation Commission, who discussed how flood risk policies have impacted housing values, and provided findings of his analysis of house price discount effects that were almost twice as large as the net present value of the insurance premium due to increases in perceived risk.

This was followed by the presentation, “Damage vs. Risk Perception: How Do House Prices Recover After Hurricanes?” where Hoanh Le, Postdoctoral Research Associate at Ness School of Management and Economics at South Dakota State University contributed to the discussion on house price recovery after hurricanes. Le’s research found that there was no persistent penalty for damaged floodplain properties, the initial drop in house prices was largely driven by direct damage, the rebound in house prices was explained by renovations and rebuilding, and the extent of spending on renovating and rebuilding was associated with the extent of the damage.

“The Effects of Extreme Wildfire and Smoke Events on Household Financial Outcomes” followed, where Sean An, VP, Supervision, Regulation, and Credit for the Federal Reserve Bank Philadelphia discussed the effect of wildfires on financial outcomes. His research found elevated spending, indebtedness, and loan delinquencies among households distant from wildfire burn perimeters but exposed to high levels of wildfire-attributed smoke in the air.

To conclude the panel discussions, “How Should we Measure Home Prices After Natural Disasters?” featured Justin Contact discussing the difficulties of assessing home values immediately after a disaster due to a lack of comparable properties, changes in risk perceptions and other supply and demand factors, a lack of granular damages data, and a lack of suitable control groups.

In a blog regarding the Fall 2023 Econ Summit, November Wilson, Senior Economist, Climate Change and ESG Branch Division of Research and Statistics at the FHFA, stated, “At FHFA, we recognize that the issues posed by climate change are cross-cutting. We are monitoring the risks posed by climate change and are actively collaborating with our interagency partners to evaluate the implications of climate risk for the safety, soundness, and mission achievement of our regulated entities. We will continue to host similar public forums to facilitate constructive discussions among industry leaders, key stakeholders, and academic researchers. Our hope is that, through continued discussions and engagement, we will improve the understanding of these topics to enhance the resiliency of the housing finance sector to climate-related financial risk.”