Q: How will real estate markets/values be affected by physical impacts of global warming? How is the insurance industry going to use climate change models to inform rates and premiums?

Asked by Alice Cook, ’99, MS ’01, New York, New York

You’ve hit upon an overlooked but extremely important economic issue! Whether it’s rising sea levels and stronger, more frequent storms affecting coastal communities or increased drought and forest fires threatening mountain hideouts, climate change will affect real estate and insurance just about everywhere we live.

According to a 2008 report by two researchers at UC Berkeley, real estate and insurance industry impacts are actually the biggest economic threats associated with climate change in California. The same is true in many states. Low-lying coastal areas, such as along the Gulf Coast, are particularly vulnerable to sea-level rise and stronger storms—and those risks are reflected in rising insurance rates and premiums. In Florida, for example, the average price of a homeowners’ policy increased by 77 percent between 2001 and 2006.

Climate change factors such as extreme weather, sea level rise, coastal erosion, floods and wildfires are projected to cause some $300 million to $3.9 billion in California real estate losses annually. It’s a huge range, due to uncertainty in climate models, impacts and adaptation, and that uncertainty makes insurers even more nervous, because they’re not quite sure what to prepare for. What we do know for sure is that California alone has $2.5 trillion in real estate assets at risk for climate change damage. That’s approximately 135 percent of the state’s annual gross domestic product!

Insurers have already begun cancelling homeowners’ policies in high-risk areas and raising insurance costs in potentially impacted locations. In Florida, Allstate dropped 320,000 policies between 2004 and 2007, and is no longer writing any new policies in that state. Allstate also no longer covers as many as 40,000 coastal homeowners in New York. The uncertainty makes some people skeptical about global warming predictions, but with both scientists and insurance agents increasingly convinced, betting on a “no-big-deal” future might well be the riskiest proposition.

And you might have to pay, even if you’re not directly affected. In response to coverage cancellations, some states are stepping in to provide coverage as insurance of last resort. These plans provide insurance coverage below actual risk premium rates—a bet against major climate change impacts, essentially. Which in effect means that all taxpayers will end up subsidizing the riskiest property in their state when the floodwaters do rise.

Real estate values probably change a little more slowly than insurance rates do—especially when sea views are involved. But in the San Francisco Bay Area, for example, most high value bayside property will be inundated if the sea level rises just one meter—well within the range of conservative scientific projections. Goodbye Marina—and goodbye, much of Silicon Valley. Or more likely, hello expensive dikes and levees. Home prices might not drop, but tax rates will almost certainly have to rise.

The effects of climate change are expected to be widespread and varied, and real estate and insurance markets may seem a little trivial compared to failed crops and spreading disease, for example. But the ongoing mortgage crisis makes it painfully clear how crucial real estate values are to our economy—and the importance of a strong economy at least is something we can (almost) all agree on.

Kelly Coplin received her bachelor’s degree in human biology in 2009.