How to Hedge Climate Risks in the Housing Industry

Presenter

Zoe B. King

Campus

UMass Amherst

Sponsor

Ray Kinoshita Mann, Department of Architecture, UMass Amherst

Schedule

Session 3, 1:30 PM - 2:15 PM [Schedule by Time][Poster Grid for Time/Location]

Location

Poster Board C7, Poster Showcase Room (163), Row 1 (C1-C10) [Poster Location Map]

Abstract

Recent extreme climate volatility has led to costly uncertainty for homeowners, homebuyers, and home insurers. Insurance companies are even withdrawing from certain U.S. states, like Florida and California. This thesis is a study of how increasing environmental instability is affecting  housing and the home insurance industry. I will analyze the conditions impacting the industry and assess solutions about how to manage increasing risk. My research will perform a literature review of relevant publications, applying quantitative and qualitative analyses as well as logical argumentation to determine the feasibility and effectiveness of risk management mechanisms, such as hedging strategies, while also assessing current insurance industry responses to the issue. The reinsurance market, where insurance companies can buy insurance from other insurers, is the primary mechanism through which insurers can spread out their risk against possible loss incurred by events like natural disasters. These protective investment mechanisms are what have become known as climate-risk hedging, but it’s clear that this risk-spreading system is under stress due to the increased occurrence of disasters, forcing new elevated reinsurance costs to be passed down to insurers and subsequently to their customers. A key component of my research will be an analysis and evaluation of three hedging strategies: participation in weather derivatives markets, architectural adjustments for enhanced resilience, and implementation of institutional changes to the credit risk system. I will address the financial implications of current and possible responses, emphasizing potential safeguards while offering insights into practical solutions for mitigating climate risk in the housing industry. 

Keywords

Climate Hedging, Natural Disasters, Home Insurance, Risk Management

Research Area

Finance

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