Climate Change, Emerging Risks and Retirement Security
By Anna M. Rappaport
Retirement Section News, April 2023
At the end of 2022, climate change was highlighted in the news as a major concern. A winter storm was sweeping across the country, with high winds and record cold temperatures in much of the country, and the Buffalo area got buried in record amounts of snow. The year-end summaries on television of key events of 2022 mentioned a large number of climate events including Hurricane Ian in Florida. The Society of Actuaries 2022 annual meeting was held in Florida, and it featured several discussions about the hurricane. The new year, 2023, started with heavy rains and damage in California.
In this article, I will focus on personal experiences and observations, what risk managers say about emerging risks, how climate and emerging risks fit into the bigger retirement picture for the individual, and how they affect actuaries and plan sponsors. I was asked to bring personal experiences with the hurricane to an annual meeting panel and the information I collected is a part of this article.
The Perspective of the Individual: Lessons Learned from Personal Experiences
I grew up in Louisiana and remember huddling in fear with my parents and siblings in 1957 as Hurricane Audrey beat down on our house. More than 400 people died.[1]
I have owned a home in central Florida for about 20 years and would like to share some insights based on my experience and of those around me plus some press coverage. I am in the middle of the state, not close to either coast.
My home was not damaged in Hurricane Ian but was damaged in Hurricane Charley (2004) and in a hailstorm about five years ago. Many other homes in my area were also damaged by these two storms. The risks from climate change are growing in this region and I am often thinking about how these changes will play out for individuals and employers of actuaries.
I learned some things from what happened financially to me and my neighbors:
- Your selection of an insurance company makes a huge difference. My husband and I had the “high quality high cost” carrier and dealing with them at claim time was A+, but neighbors with lower cost carriers got very little support. There was a huge difference in how different companies responded to and handled similar damage. I was stunned at how large the difference was. It was a real wake-up call for me about the realities of insurance when it does not work well.
- Exactly what type of coverage you have matters. For example, if home values and materials have increased in cost, replacement value coverage will provide a very different result than if you do not have that coverage.
- Flood insurance can be critical. It is a separate policy and much of the damage from storms, whether coastal or inland, can be from floods and resulting water damage.
One of the other panelists at the 2022 SOA annual meeting, Nate Worrell, lives in Babcock Ranch, a housing development near the worst hit area of Hurricane Ian. This community was built to withstand these types of storm conditions, and it did.[2] The design and construction of individual structures and community infrastructure matters.
Here is another anecdote. My friend, a widow, lived in Good Samaritan Village, a senior community in Kissimmee, central Florida, less than 15 miles from me on the banks of Shingle Creek. Sections of it had flooded due to Hurricane Ian and several other times in the last 10 years. Her apartment flooded and is one of over 500 that will not be rebuilt. She was renting, lost her home the day of Hurricane Ian and needed to find a new place to live. My understanding is that the community offered displaced residents help in relocating to some of their other locations, but she decided to find a new home elsewhere. She is over 90, has mobility and health problems, and was lucky to have friends who made arrangements to care for her. Fortunately, someone decided to store her important papers and jewelry where they were not destroyed, but she lost her clothing, furniture, and other personal possessions. She received some financial help from FEMA. She was lucky to have a new home, people to help her and to be with friends. This location was not the only one destroyed by floods in this storm. According to a news report, 523 homes in Good Samaritan Village are not being rebuilt.[3] I expect that there will be an increasing number of situations where homes will not be rebuilt after repeated flooding. I do not know how many homes in the U.S. are badly affected by flooding in any year, but in an era with increased impacts from climate change this issue will continue to get worse.
Manufactured Homes
There are different types of construction and communities in the U.S. Many people, particularly seniors with fewer resources, live in manufactured homes. The costs of these homes are generally less than conventional homes and there are pros and cons about living in them.[4] These communities are more vulnerable to hurricane and other wind damage. There are many current issues with regard to such communities and legal protections for their residents are often ignored. An article estimates that there are 2.7 million mobile homes in 49 states and many legal risks for owners.[5] The Villages is a very well-known retirement community in the United States. An article from manufacturedhome.com indicates that there are currently 25 mobile home parks that are part of the Villages.[6] That article also indicates that it started as a mobile home park. I do not know what percentage of the Villages is mobile homes.
Standards for mobile home construction have increased over the years, particularly after hurricane Andrew.[7] Buyers of new homes today have options to choose between different levels of wind resistance in construction.[8]
A Somewhat Bigger Picture
The impact of climate change on retirement is more than a theoretical issue. There has been press coverage about Florida retirees[9] who have lost most or all of their assets from Hurricane Ian. A story in Scientific American indicates that uninsured property losses are estimated at between $10 and $17 billion. While it estimates the insurance losses, it does not provide an estimate of the number of people or the impact on those wiped out financially.[10]
- These individuals often have little financial assets, but own a home or business affected by the storm.
- Mobile homes are often featured in press coverage, as they are generally more vulnerable to storm damage from wind—from both hurricanes and tornados. There is no difference in vulnerability to flood damage.
- Homeowners can choose from options including full coverage, no insurance, homeowner’s insurance but not flood insurance or inadequate insurance coverage. Those who purchase insurance may not receive a satisfactory settlement. Note that lenders require insurance, but if there is no mortgage there is no mandate to have insurance.
- Insurance has gotten quite expensive and lower income homeowners may not be able to afford it. In any case, some homeowners will take a chance if it is not required.
- There are many retirees in the hard-hit counties with a bad outcome from Hurricane Ian—homes destroyed but they will not get insurance money or not enough, and their homes were their major assets. There are others away from the hardest hit counties who also have flood damage. The anecdote above refers to one housing development in the Orlando area.
- There are also older individuals in these areas with small businesses who will not get enough insurance to keep going and whose business was their primary asset.
Understanding Hurricanes and Insurance
Hurricane damage can come from wind damage or flooding. In Florida, homeowners’ insurance covers damage from wind but not flooding. Flood insurance is usually provided by a federal program (there are also some private options). Under the flood insurance program, a $250,000 maximum is what a private home can be insured for with an additional $100,000 available to insure contents. For businesses, the limits are $500,000 for a business structure and $500,000 for additional items. For many homes this is insufficient protection.
The risk of flooding from storm surge is greatest for people on barrier islands and near the shore. There is also risk for people near rivers or creeks, in low lying areas, or near roads with poor drainage. Structures that flood also can suffer wind damage, and many structures suffer both, leaving the building owner in the middle between two insurers.
Homeowner’s insurance is expensive, particularly in areas near the shore. Not all homeowners have insurance. Homeowners and flood insurance are generally required by the lender for a homeowner with a mortgage, but it is not required if there is no mortgage.
The insurance markets in storm prone areas have had difficulty. Insurance carriers have left the market and prices have risen a great deal. In Florida, Citizens Insurance company was established by the legislature in 2002 in order to enable citizens who could not get market-based insurance to get homeowners’ coverage.[11]
The challenges for homeowners in areas that experience major weather events include insurance company bankruptcies, rising insurance costs due to increasing severity of events and limited availability of insurance. The Florida legislature passed new legislation in the fall of 2022 designed to help the insurance industry.[12]
Staying Safe During a Violent Storm and Managing After the Storm
Violent storms include hurricanes, tornados, and severe thunderstorms. They may involve high winds, heavy rain, lightning, falling trees, and flooding. The amount of advance notice of storms and their severity varies greatly. Hurricanes may be predicted several days in advance, but their path and intensity can change, so areas that are expected to get major damage may shift. For tornados, the warning of exactly where they are going is often very short, so people have only a few minutes to get to safety. The possibility of strong thunderstorms and tornados happens fairly often. We had no warning at all about the hailstorm we experienced a few years ago. We were in the community restaurant when it happened, and everyone was very surprised. There was major damage, but in a limited area. While many homes in our community had substantial damage, nothing had happened a couple of miles away. The edges of the area of the storm damage were amazing. It was as if there was a wall—everything was normal on one side, and there was a lot of damage on the other side. The most dramatic thing was looking at the impact the storm had on the trees. It was April 1, and the trees were very green on one side of the line and leaves were stripped leaving the branches bare on the other.
For severe thunderstorms and tornados, people are told to take cover and stay away from windows, in a basement if possible. A few homes have safe rooms but most do not, and it is not clear what would be the best strategy if there was a serious tornado. It should be noted that safe rooms provide excellent protection from a lot of wind damage, but they do not protect from major flooding.
During a hurricane, roads are closed and may be closed for several days or longer even afterwards, depending on how much damage and debris there is. Power failures are widespread, and it can take days to restore power. An area may also not have running water. Hurricane Ian destroyed the bridge connecting Sanibel Island and the mainland, making reconstruction more difficult.[13] After storms, it may take a few days for supermarkets and drug stores to reopen. For large storms, it may take longer for shelves to be restocked.
Recovery from smaller hurricanes with less damage can also take a long time. We had damage to our home from Hurricane Charley in 2004.[14] Our back room and roof needed repairs and we had a “blue roof” for about a year. Many homes needed repair over a wide area and there were two big problems: Shortages of materials, and manpower to do repairs.
Major storms are also a threat to human life. They shut down access to emergency treatment for limited periods. Evacuation is recommended for people in high-risk areas in the primary path of hurricanes. Our community is in the center of the state, so it is usually not an area with recommended evacuation unless a strong storm is expected to go directly over it. In our community, there is a multi-story motel that is a larger and stronger building than the single family manufactured homes or the attached campground. The motel is an evacuation area that would work for moderately high winds. People evacuate to the motel when there are major hurricane warnings.
People on the coast usually want to get away from the coast and into stronger structures when hurricane risk is high. Areas like the Florida Keys have evacuation orders more often and have very limited highways offering evacuation routes. Evacuation orders may be issued early but if a storm shifts paths or gains intensity, they can come very late, and it may be quite tricky to actually find a place to go. This is particularly true if the storm is very large. If it slows down, there can be flooding over a large area. Schools are sometimes used as evacuation centers.
Evacuation is not easy even for people who are mobile, know what to do, and have good transportation. Big challenges include securing your property, figuring out what to take and taking it, finding a place, and getting there. Evacuees may need to travel over completely clogged roads. Additional challenges must be addressed for those with pets and children or those requiring pills or medical equipment and treatments.
Evacuation can be very difficult (or impossible) for people with disabilities or limited mobility and for people who do not drive or do not have cars. These people can evacuate only with a lot of help, and they need help after reaching a center. While these facilities generally have generators and plans to deal with storms, they can also be severely damaged or flooded.
People in assisted living, nursing homes or hospitals may also need to be evacuated. This is up to the management of the facility and depending on what is happening in the area can be very difficult. There may not be any good place to go.
An anecdote: A continuing care retirement community (CCRC) in Florida near the Gulf Coast was heavily hit by Hurricane Ian. The CCRC had an evacuation center on the property and a plan that included management by the employees. The residents who were there during the storm were taken care of.
It is important for individuals to be realistic about what they would do if there were a serious storm. If they do not have support and good options, they should consider whether they need to move to a less vulnerable area or a more protected arrangement.
The Individual’s Perspective: Another Twist of the Issue of Home Ownership, Climate and Community Risk
The SOA study “Segmenting the Middle Market: Retirement Risks and Solutions—Phase 1 Report Update to 2010 Data”[15] provides an analysis of the assets of Americans at and near retirement age. A key conclusion is that, for certain middle-market segments, non-financial assets (primarily their homes) are much more valuable than financial assets (not counting the value of defined benefit income or Social Security). This analysis is based on Survey of Consumer Finances data. Some retirees have no financial assets. Such retirees are vulnerable to devastating losses if their homes are damaged or destroyed and not fully covered by insurance. For this group, climate risk is a huge financial risk in addition to being a life risk.
At many times during my life, I heard a common belief that putting as much money as possible into one’s home was a good investment because home values always went up. I view this as an outdated and inaccurate perspective. While home values often have gone up, there have been situations when they go down, sometimes permanently. There were major declines in values that lasted for long periods after the Great Recession.[16] I believe that it is important to focus on affordability when choosing a house, and not to focus on what can be afforded due to expected increases in pay and/or housing values. I also believe that it is much better to have financial assets as well as a home and to consider what is affordable in light of the total picture.
Community choice and risk are very important in deciding where to live. This includes evolving, and typically increasing, risks due to climate change. We focus on pictures of destroyed homes in the areas most affected by events such as a hurricane, tornado, flood, earthquake, or wildfire. Homes can also be destroyed by fires not connected to any climate event. Climate events are linked to location. There are a variety of other forms of community risk linked to the location of a home. While some may be predictable, others are not. The town one lives in can have major problems, leading to a decline in public services, increase in taxes or both. A large employer in town may close its operation, or an important hospital (maybe the only one) can close. Neighborhoods can improve or decline. Condominium associations can have a variety of problems, causing difficulties for the owners, unexpected special assessments and loss in value. New developments near a home can improve or hurt the situation of residents and home values. For example, a new park can enhance the area around the park while improving flood control. A toxic waste dump, expanded highway, or a large manufacturing plant can make an area much less desirable as a place to live. Gated communities offer security and a variety of amenities. Some provide that the residents own their own land and others that they lease it. Both options have risk. Where the community has an owner and the land is leased, it can change hands and the new owner may change priorities in ways the residents do not agree with. An anecdote: I had friends in a community where the residents owned their land and felt secure because of that. However, there were private owners of the central community facilities and services. The owners of the community were divorced and there were disputes over the ownership with years of fighting, collapse of community services and events, and ultimately, bankruptcy. Community risk may be predictable, as when the community is located in a flood plain, but it also may be unpredictable.
Discussions about diversification often focus on financial investments and not on the balance between assets in one’s home versus financial assets. My personal view is that these discussions should consider the issue of how home value fits into the personal portfolio. They should also consider climate and community risk with regard to housing location.
The Risk Manager’s Perspective: Societal Risks and the Survey of Emerging Risks
Recent years have greatly increased the focus on societal risks. Climate and cybersecurity risks seem to be in the news constantly. The experience of 2020–2021 with the pandemic also reminded us how important resilience is and how valuable it is to be able to adapt to unexpected circumstances. The SOA Survey of Emerging Risks is a survey of risk managers focusing on a range of emerging risks. The 16th Annual Survey of Emerging Risks[17] was conducted in November, 2022 and released in January 2023.
Twenty-three risks in five categories are included. The top five emerging risks from 2019 to 2022 are as follows:
- Climate change—number 1 in four years 2019 to 2022
- Cyber/networks—number 2 in 2019, 2020, and 2021—was number 3 in 2022
- Wars (including civil wars) —number 2 in 2022
- Pandemics/infectious disease—number 3 in 2020 and 2021—first time on the top 5 list in 2020
- Disruptive technology—number 4 in 2020 and 2021—down from number 3 in 2019
- Financial volatility—number 5 in 2019 to 2021, number 4 in 2022
- Demographic shift—number 5 in 2022 and number 4 in 2019
Climate risk, actuarial assumptions and calculations: As climate considerations affect so many aspects of life, actuaries have recognized that, in addition to property/casualty insurers, they need to be considered by life and health insurance companies and in long-term care. They also should be recognized by pension actuaries. How to do that is evolving. The 2022 SOA report “Climate Risk Analysis for Life and Health Insurance Companies”[18] provides an overview of the issues involved in incorporating climate risk in the actuarial management of these companies. An article in Long-Term Care News, “Climate Considerations for Long-Term Care,”[19] discusses the applications of the concepts in the broader life and health insurance focused report to long-term care. Actuaries doing projections for retirement-related benefits also need to consider these risks. These two references provide a good starting place for thinking about how to incorporate emerging risks in these calculations.
The Investor’s Perspective: Need for focus on emerging risks
Emerging risks are not generally explicitly considered in retirement planning. However, organizations structuring investment portfolios, retirement products, and financial wellness programs should take these risks into consideration as they structure their offerings. Stability of assumptions and risks over the insurance contract or investment has made these products effective in transferring risk, but climate change has reduced the time horizon where stability can be expected. These risks affect investments generally, the companies that sell retirement products, individuals, and society at large. Events such as storms and pandemics can have huge immediate impacts. These impacts can be long-term or just for a temporary period.
Emerging risks and investments: Climate change and other emerging risks can have huge impacts on individual companies and they impact the society as a whole. Investors or investment managers selecting individual stocks need to consider how the companies are affected by and responding to all major risks facing the companies they choose for investment. Investors unable to evaluate these issues should not be choosing individual stocks but should be investing in pooled funds. Indexed funds do not require such evaluation by individual investors. Investors need to match their choice of pooled funds with their goals. Rental property is also a popular investment for individuals. Climate risk evaluation is particularly important for this type of investment.
The Plan Sponsor Perspective: In Light of Emerging Risks
For the last few years, employers have recognized the importance of their employees’ financial and general wellness as an important business imperative and as an employee benefit issue. Within American society, some individuals are doing extremely well while others are living paycheck-to-paycheck. The number of people facing food and/or housing insecurity grew a great deal in recent years. In many ways, U.S. society seems to be a tale of two very different stories—one story focused on the financially fragile and one about those who are financially secure. For many Americans, gaps in financial literacy present a barrier to financial wellness. The COVID-19 pandemic brought emerging risks to employer’s attention fast and hard. Climate change and cyber security have had a repeated impact, with a major impact in some areas and after some events, but with a more distributed impact. All of these events have in common a disruptive effect on organizations and employees, and employees needing help. Sometimes the disruption totally dominates lives. Both climate events and COVID-19 brought to light the need for much larger emergency funds than most people have, and the way that emergencies can totally dominate the situation. There was government aid linked to both, but in neither case did it completely solve the problem, and in both cases, there is information needed about accessing it. Accessing aid can be quite difficult, particularly for those who need it most and who may lack the technology and skills to report and file a claim.
These events raise big questions for employer-sponsored financial wellness programs:
- Do we have a role in providing information about hurricane and other disaster preparedness?
- What is our role when an emergency affects all or a group of our employees and retirees?
- Should we help employees and retirees respond to these emergencies and how?
- Should we help employees and retirees build better emergency funds?[20]
- Should we help employees and retirees understand and access community and public resources?
- Should we support employees who are assisting or caring for parents and other family members who need more help as a result of a climate event?
- Should we offer education about climate risk and how it may affect employees and retirees?
The context for answering these questions is informed by SOA consumer research. As part of its consumer research on finances in retirement, financial perspectives and well-being, the SOA has conducted two recent surveys: “Financial Perspectives on Aging and Retirement Across the Generations”[21] in 2021 (the 2021 Survey) and “Financial Risk Concerns and Management Across Generations”[22] in 2018 (the 2018 Survey). These studies focus on Americans at all income levels, and the results should be representative of the total population. Big findings from this research linked to these issues include:
- Many individuals across the generations are living paycheck-to-paycheck and are ill-equipped for any significant disruption.
- Many individuals have no or almost no emergency savings.
- Financial fragility is a major issue and it increased between 2018 and 2021.
Earlier SOA research indicates that families are an important source of support when help is needed.[23] Complementing this consumer research is the SOA’s “16th Annual Survey of Emerging Risks,” mentioned above. Organizations are already recognizing these risks to their business and people. Recognizing them in financial wellness programs is another dimension of the response to emerging risks.
Questions for the plan sponsor include:
- When employees are financially fragile, how does that affect our business?
- How does our organization want to help financially fragile employees and retirees become more stable?
- Does our response to these emergency situations need to recognize the different situations of different employees and retirees, and be tailored to individual employee needs?
- How much of a barrier is fragility to retirement savings?
Tips for Retirees and People Nearing Retirement
This information is provided for retirees and near retirees. It may also be useful for financial wellness providers, employers, and financial advisors. Employers are impacted when their employees and close family members are impacted by an event.
- Carefully consider climate risk in the area you are choosing to live.
- Don’t put all your assets into your home. Consider your total picture and diversify assets.
- Be careful to get all of the insurance coverage you need, particularly if a high proportion of your assets is in your home. Seek out a good insurance carrier.
- Don’t forget about flood insurance risk and coverage.
- Have an evacuation plan that includes valuables to take with you, transportation options to leave, care for pets and other dependents, and places to go to.
- Don’t live in a situation where there is good chance that you will need to evacuate if you are not able to do so or it will be very difficult.
- Pay attention to storm preparedness information from government agencies and other sources.Try to keep parents and other family members out of difficult situations.
Conclusion
Climate risk and other emerging risks affect a wide variety of stakeholders connected to the retirement system. It is important for all of the stakeholders to have an awareness of these risks and make suitable adjustments. Actuaries have knowledge and skills to add to the analysis of these issues and discussions about alternative solutions.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.
Anna Rappaport, FSA, serves as chairperson of the Committee on Post-Retirement Needs and Risks. She can be reached at anna.rappaport@gmail.com.