2017 Most Dangerous Emerging Risks

Coastal Mortgage Value Collapse

As seas rise, so does the risk that buyers will become leery of taking on mortgages along our coasts. 
By: | April 7, 2017 • 7 min read

Rising seas encroach on our cities and towns at rates exponentially greater than before.

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So-called King Tides, urged on by climate change and brought about by the close alignment of the sun, the moon and the earth are already producing flooding in Miami 10 days a year.

Debate the cause if you want to expend more hot air denying science. But it’s a fact that resale values of coastal homes in Miami, Atlantic City and Norfolk, Va. are already starting to erode.

These bellwether locations signify a growing and alarming threat; that continually rising seas will damage coastal residential and commercial property values to the point that property owners will flee those markets in droves, thus precipitating a mortgage value collapse that could equal or exceed the mortgage crisis that rocked the global economy in 2008.

“Insurance deals with extreme weather and billions of dollars of losses, but what we are talking about is uninsured loss of fair market value that is trillions of dollars in losses and I am not talking about in 2100, I’m talking about the next mortgage cycle,” said Albert Slap, president of Coastal Risk Consulting, a Florida firm that provides lot by lot modeling of flood risk.

Models created by Coastal Risk Consulting show flooding rates of Miami properties are going to rise substantially between now and 2050, within that 30–year mortgage cycle he refers to.

Albert Slap, president, Coastal Risk Consulting

“The results of our modeling and that of NOAA and many others shows that the increase in flooding on people’s properties, due to astronomy and physics, not weather, is alarming and significant and in all likelihood is not backstopped by insurance,” Slap said.

Adding to the threat is that real estate agents and homeowners aren’t incentivized or required to reveal how frequently properties flood, or how exposed they are to flooding.

“Forty percent of Americans live on the coast, which means you have trillions of dollars at risk for climate change that hasn’t been modeled for default increases,” Slap said.

The Pew Charitable Trusts, as part of its testimony to Congress as the National Flood Insurance Program undergoes review, is asking that all homeowners be required to report on that risk.

Many coastal homes are backstopped by the NFIP, which is still billions in debt from its losses in the Katrina-Wilma-Rita hurricane cycle of 2005.

Private sector insurers are eyeing ways to write more flood business. But if the NFIP suffers further losses, and private sector insurers retreat, what then?

“If you look at it systematically, if a broad number of insurance companies decide that they need to triple homeowners insurance rates, or they need to pull out of a local market, that would create a lot of problems in terms of the value of the properties that are in that locale,” said Cynthia McHale, president of insurance for Ceres, a nonprofit that advocates for sustainable business practices.

In November, Sean Becketti, the chief economist for the economic and housing research group at Freddie Mac, the federally backed housing lender, co-authored a paper that documented this very risk.

The paper referenced the fact that daily high-water levels in Miami are increasing at a rate of an inch per year, much faster than the rate of global sea-level rise. Other cities along the Eastern seaboard are experiencing a 10-fold increase in the frequency of flooding, according to Freddie Mac.

“A large share of homeowners’ wealth is locked up in the equity in their homes,” Becketti wrote.

“If those homes become uninsurable and unmarketable, the values of the homes will plummet, perhaps to zero.”

“Forty percent of Americans live on the coast, which means you have trillions of dollars at risk for climate change that hasn’t been modeled for default increases.” —Albert Slap, president, Coastal Risk Consulting

In the housing crisis of 2008, according to Becketti, a significant percentage of borrowers continued to make their mortgage payments even though the value of their homes was less than their mortgages.

Cynthia McHale, president of insurance, Ceres

“It is less likely that borrowers will continue to make mortgage payments if their homes are literally underwater,” Becketti said.

“As a result, lenders, servicers and mortgage insurers are likely to suffer large losses,” he said.

Insurers would suffer, according to Ceres’ McHale, and not just as backers of insurance policies.

“Insurance companies themselves are major commercial and residential mortgage holders,” she said.

“They assume that the property is going to hold its value and act as collateral if needed. If it doesn’t hold its value, where is the collateral?”

“Not only will their mortgages be metaphorically underwater, they are going to be literally underwater,” said Slap.

“And there is no coming back from it.”

“The New York Times” published a piece in November that detailed the case of Roy and Carol Baker of Sarasota, Fla. The Bakers tried for months to sell their home in Siesta Key, according to the story, but buyers kept backing out when they discovered the annual flood insurance premium was about $7,000.

“This experience will become more common, economists say, as the federal government shifts away from subsidizing flood insurance rates to get premiums closer to reflecting the true market cost of the risk,” reporter Ian Urbina wrote in his piece.

The Climate Race

What Becketti, Slap and others say is true, said Helen Thompson, a director, commercial marketing at Esri, the mapping and analytics company that works with insurers and property owners.

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But she said there is a solution, the public and private sector working together to address the problem: That and about $4 trillion.

“The challenge for a lot of people is to understand the scope and the scale of this issue, and in some ways, like the mortgage bubble before, if you are ignorant of the problem, you can’t fix it,” she said.

“I think taking action means crafting a discussion of the problem and moderated expressions of what those solutions are, based on science and analysis and not hyperbole,” she said.

It’s well documented how dire the nation’s infrastructure needs are.

Thompson compares the current dilemma posed by climate change and sea rise in the U.S. and elsewhere to the cholera epidemic that ravaged London in the mid-19th century. What’s needed now, she said, is something akin to the massive public works projects that were undertaken to provide Londoners with cleaner drinking water.

“They realized the social and political cost of this,” Thompson said.

“We need to change our thinking to say this is not just about handing debt to our children, it’s about maintaining the same level of opportunity and quality of life for our children,” she said.

Thompson points to China, which she says is investing in climate change-resistant ports and additional infrastructure internationally to remain economically competitive.

“It’s in their best interests as a global manufacturing hub to mitigate the cost and the impact of climate change because of how much collateral damage it will do to their economies,” Thompson said.

Helen Thompson, director, commercial marketing, Esri

She said the U.S. needs to go down the same path, and step on it.

“I call it the ‘climate race,’ like the space race,” she said.

“The infrastructure needs to be created to deal with this, and the United States is massively lagging.”

Slap envisions another solution, a “climate ready” mortgage program, similar to the federal government’s energy efficient mortgage program, which gives property owners federally guaranteed loans to make energy efficiency upgrades.

Such a program would provide loans for sewage backflow preventers, changing the grade on a driveway, or elevating a home on a platform

Thompson said the massive infrastructure projects she envisions could include moving the vital container operations at the Port of Miami inland and constructing a berm to defend against sea water.

Office building owners in Lower Manhattan, which was so damaged by Superstorm Sandy, are increasingly investing in flood prevention barricades and moving critical building components like HVAC and plumbing components to higher floors.

Americans just got a chilling reminder of the dangers presented by changing weather patterns and crumbling infrastructure. Fears that the Oroville Dam on California’s Feather River would buckle under heavy rainfall got everyone’s attention.

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“People are looking at that and saying, ‘We didn’t realize what this change in weather patterns means in the long term,’ ” Thompson said, and they are relating the Oroville event to infrastructure in their own towns and the risks they present.

As the NFIP undergoes its annual review in Congress, Slap said administrators would do well to exclude King Tide events.

“If you were to go to NFIP and ask them if they cover King Tide flooding, they would say, ‘If it meets our definition of flood then we must cover it.’ This is a red flag, because what you are saying is the government and the taxpayers are covering sea level rise and that is not something we can afford,” Slap said. &

________________________________________________________________

2017 Most Dangerous Emerging Risks

Artificial Intelligence Ties Liability in Knots

The same technologies that drive business forward are upending the nature of loss exposures and presenting new coverage challenges.

 

 

Cyber Business Interruption

Attacks on internet infrastructure begin, leaving unknown risks for insureds and insurers alike.

 

 

U.S. Economic Nationalism

Nationalistic policies aim to boost American wealth and prosperity, but they may do long-term economic damage.

 

 

Foreign Economic Nationalism

Economic nationalism is upsetting the risk management landscape by presenting challenges in once stable environments.

 

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]