Bonds

With strong hurricane season predicted, market eyes insurance

As the climate change debate continues, and with a potentially strong hurricane season forecast, Municipal Market Analytics said states may be forced to intercede in private insurance markets.

“A year of hypothetically larger catastrophic and secondary natural disasters would renew pressure on the states to intervene more directly in their private insurance markets to minimize economic and other consequences,” MMA said in its weekly Outlook report.

“This highlights the political aspect of climate change risk” that the states “ultimately shape economic and credit outcomes for municipal borrowers,” the report said.

States like Louisiana, shown after Hurricane Ida, are struggling with property insurance problems.

Bloomberg News

Whether and how states “invest in adaptive infrastructure and utilities, including needed adjustments to property casualty insurance mechanisms, will determine medium- and long-term borrower downsides from climate changes as they occur,” MMA said. “States (and, of course, local governments) showing proactive (or even effective reactive) management of these challenges will present a better portfolio of local government borrowers to the municipal market and deserve a larger allocation of investor dollars, all else being equal.”

Florida is considering adjustments to a state insurance program, North Carolina has rejected an insurer request to double rates, and California is trying to deal with limited flooding and wildfire insurance.

“The current property insurance crisis in many states is a sign that climate change is starting to affect local property values,” said Triet Nguyen, vice president of strategic data operations at DPC Data.

And Fitch Ratings said it is taking notice and carefully monitoring “the health and status of property insurance markets” in areas exposed to hurricane risk, said Eric Kim, Fitch head of U.S. state ratings.

A National Bureau of Economic Research study found even a decade after a hurricane, “municipalities thrashed by hurricanes … experienc[ed] lower revenues and associated declines in public services and investment relative to otherwise similar communities spared by the damaging storms.”

Kim said, “The risk of severe weather is an ongoing one for many state and local governments, including those along the Gulf and Atlantic coasts.”

The agency takes into account governments’ ability “to respond in the near-term to different kinds of economic and fiscal volatility, as well as the critical role the federal government plays in assisting them in medium and long-term remediation and recovery efforts following natural disasters.”

Kroll Bond Rating Agency expressed concern about Louisiana. “The proximity of Louisiana’s low-lying coastal parishes and population centers to the Gulf of Mexico make them highly vulnerable to economic disruption due to environmental factors,” said Michael Taylor, senior director at KBRA.

“Our ratings on Florida counties incorporate sound planning initiatives, that help mitigate environmental risks for now,” S&P Global Ratings Director Jennifer Garza, Associate Director Krystal Tena, and Managing Director Nora Wittstruck said in an email Tuesday. “We conducted a comprehensive review of various planning documents used by our rated Florida counties that we believe, coupled with these counties’ maintenance of very strong reserves, are offsetting considerations for the risks they face. This includes good state oversight and financial assistance programs provided by the Florida Division of Emergency Management [to] help fund resiliency projects.”

AccuWeather Chief Meteorologist Jonathan Porter said Monday he has “serious and growing concerns” about the impending season, which starts June 1, due to “exceptionally warm” Atlantic Ocean waters.

Additionally, the switch from an El Niño to a La Niña ocean pattern in the Pacific waters will contribute to a strong hurricane season, Porter said.

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