How Does Climate Change Impacts Real Estate?

What is Climate Change Risk Assessment and How This Rating Impacts Real Estate

Walkability ratings have been par for the course in real estate listings for years. Why not include climate risk ratings as well? The impacts for the insurance industry are important.

Climate Change Impacts Real Estate

What is a Walk-Score in Real Estate?

A walk score is calculated by compressing huge amounts of data into a single metric, to identify how “friendly” a property is for access to everyday amenities simply by walking. Generally, the higher the walk score, the higher density of resources within the neighbourhood.

How Do Insurance Companies Mitigate Risk Using Walk-Scores?

A high walkability rating has positive implications for health, the economy and the environment. Walking 2.5 hours weekly can lower diabetes risk by 58 percent. A woman who walks three or more hours per week has a 35 percent reduced risk of a major coronary event. Clearly, a high walkability score has implications for health insurance and car insurance, not to mention property insurance.

In the same way that a walk score helps a prospective homebuyer understand the benefits of the location of the property, a climate risk score could help them understand the potential hazards. 

Who is better placed to provide the reality check on a prospective property than an insurance professional? 

Climate Change Risk Assessment for the Insurance Industry & Real Estate Industry

Climate risk considerations in real estate include physical risk and transition, or regulatory, risk. Physical risks relate to the damage to buildings—steady over the long term, or severe damage in the short term—from extreme weather caused by climate change. In the same way that walk scores vary depending on location, climate risk can also vary depending on geographic location.

Transition risks arise from making the transition to a low-carbon economy, and are based on the carbon intensity of the property and estimating costs of meeting carbon-reduction targets.

How is Climate Change Affecting the Insurance Industry?

In short: location, location, location!

A nationwide analysis of the American housing market indicates that publicly available flood maps are not used, or are underused, in the pricing market; this contributes to underpriced properties. The flip side is that the underpricing increases incentives for prospective homebuyers to buy in hazardous places, or developers to build in areas at risk of flooding. This has huge impacts on the insurance industry. By reflecting climate risk in prices, markets can discourage excessive development in hazardous areas. 

The analysis found that, based on information available in public flood hazard maps, houses in flood zones in the US are currently overvalued by about $43.8 billion. This means real estate markets could become volatile as weather events intensify. 

Risk is the insurance industry’s reason for existing. Risk assessment is already deeply embedded in organizations’ risk management and underwriting processes, and climate change risk assessment for the industry is a response to our lives now. The insurance and real estate industries could work hand in hand to assess the risks to properties from climate change and by giving a climate risk score to each property. 

If insurers are well prepared to be there for policyholders during catastrophic weather-related extremes, wouldn’t it be important for prospective property owners to also be well-informed and well-prepared?

Pick up the phone and call your local real estate agents to start the conversation. 

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