Submarine? Banks play home loan lottery as insurers bail out
SYDNEY / LONDON (Reuters) – Just a year after losing their homes to flooding in parts of Australia’s northeast coast, Queensland, people are moving into new homes built on or near the same plots.
But while banks have been all too willing to offer them long-term loans at rates in line with the national average, insurance companies, which have suffered insured losses of A $ 1.24 billion ( $ 820 million) following the Townsville floods, are more cautious. .
A trader who bought a new home in Townsville after moving away from his water damaged home 15 kilometers (9.32 miles), said the insurance premium had increased by 350%, a price that ‘he wasn’t prepared to pay to protect himself from another flood.
“The locals call this place ‘Brownsville’, that’s how dry this place was. It is therefore unfair that insurers react in such an extreme way after a single event. It was a one-time flood in 500 years, it won’t happen again in my lifetime, ”said the trader, who would only be identified by his last name Cullen.
Banks seem to take a similar view, with long-term finance still widely available for new and existing homes, while insurers are more picky.
Allianz, for example, has become more selective in writing new policies in Townsville, brokers have said, while others, including Suncorp and QBE, have stopped covering large apartments after the Queensland floods.
Insurers agree that flooding was previously a 500-year event, but say climate change has made such events more frequent.
This discrepancy is found in regions of developed countries that have been affected by floods, wildfires or other extreme weather events linked to climate change and worries regulators and industry leaders.
They fear that banks are building portfolios of long-term loans against construction projects, infrastructure and real estate that become uninsurable.
Extreme weather conditions could lower real estate prices and expose banks to defaults on home loans or major commercial projects. Without insurance, homeowners might not be able to afford the cost of maintaining their property.
Among those most affected is Larry Fink, boss of the world’s largest investor, BlackRock, who warned in his annual letter to boards in January about the risks to banks if insurance were to dry up. Fink said banks may no longer be able to offer 30-year mortgages, which he described as “a key part of financing,” if fire or flood insurance is not available.
In Italy, insurers are refusing to provide flood coverage in Venice, where flooding is frequent and worsening due to climate change.
During the Townsville floods, the blow to banks was less severe, and as insurers leave, new real estate developments continue to emerge, backed by the nation’s major banks.
“As a banker, we assume with our client that insurance will generally be available and affordable. That is changing, ”said Mathew Murphy, head of social and environmental risks at Australian and New Zealand Banking Group.
“What has changed is the awareness and emergence of potentially more serious climate damage, be it a storm, fire or other climate hazard,” a- he added.
The potentially dangerous divergence between the approach taken by banks and insurers to housing and climate change has been pointed out at the highest levels of finance.
As banks around the world begin to do more to understand the risks, the pace of change is slow.
Bank of England Governor Mark Carney is among those pushing financial services companies to better understand and be more transparent about climate risk and plans to mitigate it.
While banks have done better than many other industries in some areas of how climate risk affects their businesses, a 2019 assessment by the Climate Related Financial Disclosures Task Force (TCFD found that only 20% reported the resilience of their strategy.
Insurers are ahead of the curve when it comes to risk modeling, with teams of scientists and hundreds of years of data to tap into, but climate change is unexplored waters.
Australia is following the BoE’s lead with plans to test banks and insurers for climate risk, as regulators fear rare natural disasters will become commonplace.
“We are discussing it with the banks. But do we still have a solution? This is where things get tricky, ”said a person directly involved in discussions between Australian banks and insurers.
While developing markets have always suffered from a lack of insurance, the problem is now spreading to developed markets.
In California, which has suffered devastating wildfires in recent years, the regulator said affected areas in 2015 and 2017 saw a 10% increase in insurance non-renewals in 2018.
The regulator issued a mandatory one-year moratorium on insurers who do not renew their policies in areas affected by forest fires in December 2019. And to raise funds to protect properties against climate risk, the state plans to launch a resilience bond.
While some US banks are now more cautious about their excessive exposure to areas affected by climate change, they have not backed down from flood-prone states like Florida or California.
But in hurricane-prone states like Texas and Florida, investors are betting against the U.S. residential mortgage bond market because they say outdated flood maps mean too few homeowners are buying flood insurance.
“I can no longer trust my story – the weather has fundamentally changed,” Peter Giger, chief risk officer of Zurich Insurance Group, said at an industry event in January.
BAD READY CALM
One year after the Townsville disaster, one of the reasons banks are happy to lend is if the proportion of customers who were more than 30 days late on their mortgages fell from 2% to 2.3% after flooding, it quickly fell to 1.9%. .
Banks have also been helped by support from the local and federal government, and they are often willing to postpone some repayments to help borrowers get back on their feet.
While these measures have worked so far, policymakers are concerned about the potential for persistent floods and fires to spur large-scale migration, triggering an increase in bad debts.
Deadly bushfires in parts of New South Wales in late December underscored the scale of the Australian problem.
The number of delinquent loans is expected to swell as hell disrupted the peak holiday season, hitting consumer spending, destroying thousands of homes and killing 33 people. Moody’s rating agency warned that more frequent and severe natural disasters point to growing credit risk to Australia’s $ 1.8 trillion residential mortgage portfolio, the largest source of income for the country’s banks. And the fires have cost insurers more than A $ 5 billion.
Queensland State Mortgage Brokers have said banks may require more documentation in high-risk postcodes, including proof of insurance before granting a loan, but the rigor with which they enforce the rules is uneven.
Commonwealth Bank of Australia, the world’s largest mortgage lender, declined to comment. The National Australia Bank said it was primarily focused on a borrower’s ability to repay and repay a loan, while Westpac said it had “standard credit checks”.
All declined to say whether or not they had reduced their loan portfolios in high-risk areas due to the losses.
Long-term forecasts for Australia are not good, with insurer IAG predicting that climate change could “start to make existing housing stock uninsurable”.
($ 1 = AU $ 1.5115)
Additional reporting by Maya Nikolaeva in Paris, Lauren LaCapra and Suzanne Barlyn in New York and Nina Chestney in London; Editing by Alexander Smith