Episode description

In 2008, the world economic system was rocked by a financial crisis that stemmed from risky mortgages being securitized and sold as safe investments to unknowing investors.  Misaligned incentives, unpriced risk, deceptive selling practices, and a lack of regulatory scrutiny throughout the financial industry led to the Great Recession, the consequences of which we're still feeling in a variety of ways today.

While somewhat different from what preceded the 2008 financial crisis, there are clear parallels with what's happening in the home insurance and mortgage markets in areas most at risk to damage from climate-worsened storms.  As large, traditional insurance companies are leaving states like Florida, California, and Louisiana because the damages from hurricanes, floods, and wildfires have become too large, new insurance companies are replacing them. These companies are smaller, less diverse, and rely on a ratings agency known to provide good ratings to underserving companies. Unsurprisingly, when climate catastrophes hit, these insurers often go bankrupt, leaving home owners and their banks with a destroyed home and asset without the funds to rebuild or even repair.  And the implications of this aren't isolated to the local level, because most of these mortgages are securitized and sold at the national level.

This week, Prof. Pari Sastry joins the show to discuss her recent paper "When Insurers Exit: Climate Losses, Fragile Insurers, and Mortgage Markets".  This paper explains how the home home mortgage, insurance markets, and global economy are interconnected and how the climate crisis is impacting all three.  As the world is still recovering from the 2008 financial crisis, it's shocking to see the early stages of what appears to be some of the same causes play out today.  And we know that the climate crisis is only going to increase the number of severe weather events, which will put an even greater strain on insurance and mortgage companies, further worsening an already fragile relationship.

Prof. Pari Sastry is an Assistant Professor of Finance at Columbia Business School where she focuses her research on climate finance.

Read "When Insurers Exit": https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4674279

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