AROUND THE WORLD, CLIMATE CHANGE, OF COURSE, IS IMPACTING THE WAY WE LIVE IN THE UNITED STATES, THE AFFORDABLE HOUSING CRISIS IS BEING PUSHED TO THE BRINK AS INSURERS STRUGGLE TO COVER AFFECTED HOMES.

BLOOMBERG REPORTER LESLIE KAUFMAN JOINS HARI SREENIVASAN NOW TO DISCUSS HER RECENT REPORTING ON THIS VERY ISSUE.

>> CHRISTIANE, THANKS.

LESLIE KAUFMAN, THANK YOU SO MUCH FOR JOINING US.

YOU WROTE A RECENT PIECE IN BLOOMBERG CALLED "A HIDDEN CRISIS IN U.S. HOUSING," AND YOU ARE NOT TALKING ABOUT INTEREST RATES.

YOU'RE NOT TALKING ABOUT INVENTORY CLOGS.

WHAT'S THE CRISIS YOU'RE DESCRIBING?

>> AS I'M SURE YOU'VE READ ABOUT, PEOPLE ARE HAVING TROUBLE GETTING INSURANCE.

BUT OUR STORY GOES A LITTLE BIT DEEPER.

IT LOOKS NOT ONLY AT -- IT LOOKS AT WHAT HAPPENS WHEN THE PRIVATE MARKET PULLS OUT AND THE PUBLIC MARKET TAKES IN.

THAT IS WHEN GOVERNMENT STARTS ENSURING PEOPLE.

AND WHAT WE'RE SEEING IS THAT GOVERNMENTS, PARTICULARLY IN STATES WITH CLIMATE CRISIS LIKE CALIFORNIA AND FLORIDA ARE BEING OVERWHELMED WITH POLICIES.

AND THEY MAY NOT HAVE A WAY TO PAY FOR THEM IF THERE IS A BIG CATASTROPHE DOWN THE ROAD.

>> SO THESE INSURERS ARE THE LAST RESULT, THESE AGENCIES THAT WILL ULTIMATELY OFFER A HOMEOWNER INSURANCE FROM A HURRICANE OR A WILDFIRE.

HOW ARE THEY ABLE TO WEATHER A MARKET THAT PRIVATE INSURERS HAVE FIGURED OUT IS TOO RISKY FOR THEM?

>> RIGHT.

SO THE ANSWER IS THEY HAVEN'T FIGURED IT OUT.

AND THAT'S THE DIRTY SECRET TO ALL OF THIS.

WHICH IS SOMETIMES GOVERNMENTS ENGAGE IN WHAT WE CALL WISHFUL THINKING.

THEY WANT THE PROBLEM TO GO AWAY.

THEY WANT INSURANCE TO BE AVAILABLE.

SO THEY OFFER IT AT LESS THAN MARKET RATES, BUT IF THERE IS A BIG CATASTROPHE DOWN THE ROAD, SOMEONE'S GOING HAVE TO BAIL THEM OUT.

AND IT'S LIKELY GOING TO BE THE TAXPAYERS EITHER IN THAT STATE OR NATIONALLY.

>> SO GIVE ME AN EXAMPLE.

HOW FAR IS THE SPREAD, I GUESS, BETWEEN THE POLICIES AND WHAT WE THINK WE ARE ENSURED FOR VERSUS WHAT THE STATE CAN ACTUALLY WRITE A CHECK FOR, BECAUSE IT SEEMS LIKE OVER THE PAST 15, 20 YEARS, IN OUR LIFETIMES THAT THESE BIG NATURAL DISASTERS ARE GETTING MORE FREQUENT.

>> THEY ARE INDEED.

THAT'S WHAT REALLY UNDERLIES THIS INSURANCE CRISIS.

INSURANCE IS FUNDAMENTAL TO OUR FINANCIAL SYSTEM.

WE DON'T THINK ABOUT IT VERY MUCH.

IF IT COMES UP, WE WANT TO HAVE OUR EYES GLAZE OVER.

BUT IT'S THE BASIS OF BASICALLY OUR ENTIRE FINANCIAL SYSTEM.

INSURANCE REQUIRES BEING ABLE TO PREDICT RISK.

FOR A LONG TIME, THAT WASN'T SO HARD.

YOU LOOK AT THE PAST.

THAT WOULD BE A PRETTY GOOD GUESS ABOUT THE FUTURE.

BUT CLIMATE CHANGE HAS UPSET THAT ENTIRE DYNAMIC.

CLIMATE CHANGE HAS MEANT THAT EVERY YEAR, OR OVER THE COURSE OF A DECADE, THINGS GET NOTICEABLY WORSE.

NOAA, WHICH IS THE NATIONAL OCEANIC AND ATMOSPHERIC ADMINISTRATION HAS SAID LOOK, THESE BILLION DISASTERS, THEY KEEP HAPPENING MORE AND MORE FREQUENTLY.

THEY WOULD HAPPEN THREE TIMES A YEAR ANNUALLY IN THE 1980s.

NOW THEY'RE HAPPENING 18, 19 TIMES A YEAR.

SO THERE IS REALLY BEEN A CHANGE.

>> SO IF I'M LIVING IN FLORIDA, IF I'M, FOR EXAMPLE, A NEW HOMEOWNER OR THINKING ABOUT BUYING A HOME AT SOME PORTION OF THAT TRANSACTION, I'M GOING THINK ABOUT HOW MUCH IS IT GOING TO COST TO INSURE THIS PLACE, RIGHT?

AND IF IT'S AN UNINSURABLE PROPERTY, I'M PROBABLY NOT GOING TO BUY IT, BECAUSE IT'S ONE OF THE BIGGEST INVESTMENTS I WOULD MAKE IN MY LIFE.

IT SEEMS LIKE INSURANCE IS GOING TO HAVE A RIPPLE EFFECT ON LOTS OF OTHER TRANSACTIONS.

>> I THINK INSURANCE DOWN THE LINE IS GOING TO BE WHERE THE RUBBER HITS THE ROAD ON CLIMATE CHANGE.

RIGHT NOW INSURANCE HASN'T BEEN ENOUGH TO DISSUADE PEOPLE FROM BUYING IN THE RISKIEST AREAS.

AND PART OF THE REASON IS THAT THE STATE HAS STEPPED IN AND STARTED TO SUBSIDIZE IT.

WE'VE MADE IT CHEAPER TO LIVE IN THOSE AREAS THAN IT SHOULD BE.

AND THAT'S THE CASE WITH COASTAL FLOOD PLAINS SINCE THE 1960s OR '70s, REALLY, WHEN WE CREATED THE NATIONAL FLOOD INSURANCE PROGRAM.

AND NOW WHAT WE'RE SEEING WITH THE STATES IS THEY'RE BEGINNING TO DO THE SAME THING WITH WILDFIRE AND WITH HURRICANES.

THEY'RE SAYING LOOK, WE UNDERSTAND IT'S TOO EXPENSIVE TO LIVE THERE.

SO WE'LL CREATE A POLICY THAT'S AFFORDABLE AND THAT'S THE PROBLEM.

>> SO BESIDES THE STATES CREATING THIS KIND OF BACK STOP AGENCIES THAT MIGHT NOT BE FUNDED, AS YOU'RE POINTING OUT, OR APPROPRIATELY FUNDED, HAVE WE MADE CERTAIN POLICIES THAT ACTUALLY PROHIBIT THE PRIVATE MARKETPLACE FROM DOING WHAT IT WOULD WANT?

I GUESS INSURANCE PEOPLE, WELL, THAT'S WHAT THEY DO.

THEY ASSESS RISK, RIGHT?

IF THERE IS GOING TO BE A GREATER RISK IN AN AREA IN A PERFECT MARKET, THERE SHOULD BE A POLICY AVAILABLE.

IT WILL JUST COST A REALLY LOT OF MONEY.

>> WELL, THAT'S A VERY SMART AND GOOD POINT.

INSURANCE COMPANIES WILL TELL YOU THERE IS NOTHING THAT'S UNINSURABLE.

IT'S JUST A QUESTION OF WHAT YOU'RE WILLING TO PAY.

BUT ALLSTATE INSURANCE MARKETS ARE REGULATED.

AND SOME OF THEM, THE BIG ONE BEING CALIFORNIA PASSED SOMETHING CALLED PROPOSITION 103.

AND THAT ACTUALLY LIMITS THE AMOUNT THEY'RE ALLOWED TO RAISE THEIR PREMIUMS EVERY YEAR WITHOUT A REVIEW.

AND SO THE RESULT IS THAT THAT'S WAY UNDERPRICED.

IN ADDITION, THE STATE PLANS ARE OFTEN WAY UNDERPRICED.

THESE INTEREST PLACES THAT WILL COME IN AND FILL IN.

AND AGAIN, FLORIDA AND CALIFORNIA, THEY'RE BOTH ARTIFICIALLY UNDERPRICED.

SO SOMEWHERE THAT RISK HAS GOT TO BE COVERED.

SO WHAT WILL HAPPEN WE THINK IS WHEN THERE IS A HUGE CATASTROPHE, IMAGINE A WILDFIRE THE SIZE OF THE CAMP FIRE, CATEGORY 5 HURRICANE HITTING MIAMI, SOMEONE'S GOING TO HAVE TO PAY FOR THAT.

>> SO WHAT WOULD THE PLAN BE IF A WORST CASE SCENARIO OR MEGA CATASTROPHE DID HIT A SUPER POPULATION CENTER LIKE A MIAMI OR A SAN FRANCISCO AND THE STATE HAS TO WRITE A CHECK, LOTS OF CHECKS, AND THEY REALIZE WE CANNOT COVER THIS?

WHAT IS THE STATE LIKELY TO DO NEXT?

>> RIGHT.

SO THIS IS THE BIG QUESTION.

THERE WAS LEGISLATIVE HEARINGS IN CALIFORNIA.

THE HEAD OF THEIR STATE INSURANCE BACKED PLAN SAYS WE DON'T HAVE THE MONEY.

WE'RE GOING HAVE TO DO ASSESSMENTS.

FLORIDA HAS A MORE EXPLICIT POLICY.

IF THERE IS A CATEGORY 5 HURRICANE THAT COMES ON IN, THEY ARE ALLOWED TO WRITE AN ASSESSMENT ON EVERY POLICY HOLDENER THE STATE.

AND THAT'S NOT JUST PROPERTY.

THAT'S YOUR MOTORCYCLE.

THAT'S YOUR HOME.

THAT'S YOUR BUSINESS.

BUT CONSIDER THIS.

IF A CATEGORY 5 HURRICANE WAS TO HIT MIAMI, THEY ESTIMATE IT COULD COST $1.3 TRILLION IN DAMAGES.

THAT WOULD BE AN ASSESSMENT OF ROUGHLY $60,000 PER PERSON IN FLORIDA.

COVERED BY INSURANCE AND REINSURANCE.

BUT THAT COULD BE A PRETTY STIFF BILL FOR EVERY SINGLE PERSON IN THE STATE.

AND PEOPLE ARE CONCERNED IT WOULD LEAD TO A FEDERAL BAILOUT.

>> SO IF I'M HEARING YOU CORRECTLY, THEN, REGARDLESS OF WHETHER YOU LIVED IN MIAMI OR NOT, DEPENDING ON THE SIZE OF THE CATASTROPHE, YOU'RE GOING TO BE FOOTING PART OF THE BILL?

>> YES.

FLORIDA IS QUITE EXPLICIT.

THEY HAVE A STATE PLAN THAT CHARGES ABOUT 30% UNDER MARKET.

IT'S BEEN GROWING TREMENDOUSLY.

THEY HAVE $525 BILLION IN EXPOSURE.

IF THERE WAS A MAJOR CATASTROPHE, THE ONLY WAY THEY'VE BEEN ABLE TO KEEP INSURANCE IN THE STATE IS BY PROMISING NOT TO CHARGE THEM, BUT TO SAY EVERY SINGLE PERSON WHO HAS AN INSURANCE POLICY HOLDER WILL HAVE A FEE TO COVER THE DEFICIT.

>> AND WHAT ABOUT CALIFORNIA?

IS CALIFORNIA IN ANY BETTER SHAPE WHEN IT COMES TO, UNFORTUNATELY, THESE HORRIBLE WILDFIRES THAT WE'VE SEEN GROW IN SCALE AND LIKE LOCALITY?

>> I THINK CALIFORNIA IS IN WORSE SHAPE BECAUSE THEY HAVEN'T DEALT WITH THE WORST CASE SCENARIO YET.

THERE WAS JUST A LEGISLATIVE HEARING WHERE THEY BROUGHT IN THE HEAD OF THE CALIFORNIA STATE-BACKED INSURANCE, AND SHE HAS SAID AS MUCH.

IF THERE IS A CATASTROPHE, WE ARE NOT PREPARED.

THEY DO NOT HAVE A SPECIFIC PLAN IN PLACE FOR WHAT WILL HAPPEN IF THERE IS A MAJOR CATASTROPHE.

AND THEY ARE WORKING ON IT RIGHT NOW.

BUT THEY ARE NOT EXPLICITLY PREPARED.

>> IS THERE A CASE WHERE THERE WILL NOT BE ANY PRIVATE INSURERS LEFT AND THERE WILL ONLY BE STATE-BACKED INSURERS?

>> WELL, FOR FLOOD RIGHT NOW, 95% IS THE GOVERNMENT.

WE'VE ALREADY PUSHED THE PRIVATE INSURANCE MARKET LARGELY OUT OF THE FLOOD INDUSTRY.

AND RIGHT NOW CONGRESSMAN ADAM SCHIFF HAS PROPOSED A BILL THAT WOULD EXPAND FEDERAL PROTECTIONS AND WOULD INCLUDE FIRE AND HURRICANES.

YOU CAN SEE A SITUATION IN WHICH PEOPLE SLOWLY MOVE TO THE FEDERAL GOVERNMENT, BECAUSE IT'S JUST LESS EXPENSIVE.

AND LET'S REMEMBER, THE FLOOD INSURANCE PROGRAM IS $20 BILLION IN DEFICIT.

IT'S NOT LIKE THE PROBLEM GOES AWAY.

IT JUST GETS BURIED.

>> IS THERE A SIGNIFICANT RIPPLE EFFECT IF ONE OF THESE STATES, INSURERS OF LAST RESORT BUCKLES?

>> YEAH.

WE THINK THEY'RE VERY SIGNIFICANT.

AND WE'RE NOT THE ONLY ONES.

SHELDON WHITEHOUSE, WHO IS A SENATOR HAS BEEN LOOKING INTO THIS, BECAUSE THE IMPLICATIONS OF INSURANCE FAILING ARE, LIKE I SAID, IT'S AT THE FUNDAMENTAL CORE OF OUR SOCIETY.

WE NEED INSURANCE AND RISKS TO BE COVERED.

IF WE GET TO THE POINT WHERE IT'S NOT, THE FEDERAL GOVERNMENT SIMPLY CAN'T PICK IT ALL UP THERE.

IS GOING TO BE A BREAKING POINT.

>> DOES THAT BREAKING POINT LOOK LIKE THE CASCADING EFFECTS THAT WE SAW IN THE FINANCIAL CRISIS, WHAT STARTED ON WALL STREET, ENDED UP HAVING HUGE EFFECTS IN THE REST OF THE COUNTRY?

>> VERY POSSIBLY.

THERE ARE A LOT OF DIFFERENT SCENARIOS.

BUT CONSIDER A REALLY BIG WILDFIRE IN CALIFORNIA.

IN WHICH BILLIONS NEED TO BE COVERED.

CALIFORNIA REACHES OUT TO THE INSURANCE COMPANIES AND SAYS YOU HAVE TO PROVIDE THIS MONEY.

SO EVEN THOUGH THEY HAVEN'T AGREED TO DIRECTLY INSURE THEM, THE STATE MAKES AS A -- AS A CONDITION OF BEING IN THE STATE THAT THEY HAVE TO PARTICIPATE.

AND WHAT'S MORE, YOU HAVE TO PARTICIPATE FOR TWO YEARS, EVEN AFTER YOU PULLED OUT.

SO LET'S SAY AS AN INSURER I DECIDE CALIFORNIA IS TOO RISKY TO INSURE, AND A YEAR LATER A MAJOR CATASTROPHE.

THE GOVERNMENT OF CALIFORNIA REACHES OUT THE ME NOW AND SAYS WELL, YOU HAVE TO HELP US COVER THIS.

AND YOU SAY NO WAY.

I'M NOT GOING TO DO IT.

AND THEN WHAT YOU HAVE IS A CRISIS.

YOU HAVE INSURANCE FAILING.

YOU HAVE HOUSES THAT ARE UNCOVERED, MORTGAGES THAT ARE UNCOVERED.

YOU LOSE CONFIDENCE IN THE MARKET.

AND AS WE KNOW, THAT CAN HAVE POWERFUL RAMIFICATION.

>> SO ARE THERE ANY STRATEGIES THAT THESE COMPANIES, THE PRIVATE ONES ARE COMING UP WITH TO TRY TO WORK WITH THE STATE?

DO THEY EVEN SEE ANY POTENTIAL?

THE PEOPLE -- THE PRIVATE COMPANIES WHO CHOOSE TO LEAD THESE MARKETS WHO DID THEIR OWN MATH AND SAY IT'S JUST NOT WORTH INSURING HOMES IN THIS STATE ANYMORE, WHAT WOULD INCENTIVIZE THEM TO COME BACK?

>> RIGHT.

SO THIS IS THE BIG QUESTION.

AND ACTUALLY, IT'S A HUGE QUESTION FOR THE INSURANCE COMPANIES, BECAUSE IN THE END, THEY WANT TO SELL POLICIES BECAUSE THAT'S HOW THEY MAKE MONEY.

SO THERE ARE TWO BASIC TOOLS.

ONE IS BUILDING CODES.

EARTHQUAKE-PROOF, WILDFIRE-PROOF, HURRICANE-PROOF, WIND-PROOF, FLOOD-PROOF.

FOR INSTANCE, IN A WILDFIRE ZONE, YOU CAN DEMAND THAT THE FIVE FEET AROUND THE HOUSE HAS NO VEGETATION OR ANYTHING FLAMMABLE.

YOU CAN DEMAND THAT HOUSES GET PUT UP ON STILTS.

AND THOSE THINGS DO MAKE A DIFFERENCE.

AND THE WAY YOU GET THERE IS THROUGH BUILDING CODES AND THROUGH INSURANCE INCENTIVES.

SO THE INSURANCE INDUSTRY IS VERY MUCH PUSHING FOR HARDENING HOMES, SAYING THEY WILL REWARD PEOPLE FOR DOING THOSE THINGS.

BUT THE THING ABOUT INSURANCE IS THEY SELL IT TO YOU EVERY YEAR.

AND AS CLIMATE CHANGE MAKES THINGS WORSE AND WORSE, SOMETHING THAT MIGHT HELP THIS YEAR MIGHT NOT BE ENOUGH IN THE FUTURE.

>> IF YOU LOOK AT THIS REALITY, AND IF CLIMATE CHANGE IS GOING TO MAKE THINGS MORE EXPENSIVE, LIKE INSURANCE, ARE WE GOING TO SEE KIND OF A FORK IN THE ROAD HERE, WHERE BASICALLY ONLY REALLY WEALTHY PEOPLE CAN EVEN AFFORD TO PROTECT THOSE INVESTMENTS WITH INSURANCE?

>> SO WE'VE SEEN THAT FORK IN THE ROAD ALREADY IN MANY PLACES THAT HAVE BEEN HIT BY HURRICANE.

LIKE IF YOU LOOK BACK AT SOME PLACE LIKE TAMPA BEING REBUILT AFTER A HURRICANE, YOU'LL FIND THAT IN THE BEST COASTAL AREAS, IT'S ALMOST ALL RICH PEOPLE BECAUSE THEY LOOK AT A BILL OF 8,000 OR $10,000 A YEAR AS THE COST OF DOING BUSINESS.

THAT'S ENOUGH TO DRIVE OTHER PEOPLE OUT OF THE MARKET.

>> WE TALKED A LOT ABOUT CALIFORNIA AND FLORIDA, BUT YOUR STORY ALSO GOES INTO STATES LIKE COLORADO WHERE WILDFIRES ARE SIGNIFICANT THREAT THERE.

>> RIGHT.

COLORADO IS A REALLY INTERESTING EXAMPLE.

COLORADO IS NOT A PLACE YOU THINK OF BEING IN TROUBLE.

BUT COLORADO HAS HAD TO START THE FIRST STATE BACKED INSURANCE PLAN THAT'S BEEN CREATED IN A LONG TIME.

AND THE REASON IS BECAUSE WILDFIRES ARE TEARING THROUGH THE PLACE.

AND THEY'VE SEEN INCREDIBLE INCREASES.

WE TALKED TO ONE PERSON IN OUR STORY WHO SAW THEIR BILL GO UP BY A FACTOR OF TEN.

HE RUNS AN INN.

AND IT WENT FROM 40,000 TO 400,000.

IT WAS HUGE INCREASE.

AND SO THE STATE IS STARTING TO STEP IN, BECAUSE WHAT HAPPENS IS BUSINESSES HAVE TO LEAVE UNLESS THERE IS INSURANCE.

>> FROM DESCRIPTION OF HOW INTERCRAWL INSURANCE IS TO THE OVERALL ECONOMY, ESPECIALLY TO THE REAL ESTATE MARKETS, THERE SEEMS TO BE RESISTANCE TO -- FROM STATE LEGISLATURES AND OTHERWISE TO MAKING THIS TYPE OF INFORMATION MORE TRANSPARENT BECAUSE IT MIGHT SLOW DOWN THOSE NECESSARY TRANSACTIONS, THAT GROWTH THAT THEY WANT SO BADLY.

>> RIGHT.

WELL, STATES OPPOSE THE PRICES THAT COME WITH REAL INFORMATION.

BUT PEOPLE THAT HAVE SO FAR OPPOSED GIVING ALL THIS INFORMATION OUT ARE THE INSURANCE COMPANIES.

THEY TELL YOU IT'S PROPRIETARY.

SO THE QUESTION IS HOW MUCH THEY'RE RAISING OUR PRICES HAS TO DO WITH ACTUAL RISK, AND HOW MUCH OF IT HAS TO DO WITH THE PROFIT MARGIN.

AND A LOT OF THIS IS NOT PUBLIC.

THAT'S WHY WHEN FIRST STREET FOUNDATION MADE INFORMATION AVAILABLE, IT WAS SO EXCITING TO A LOT OF PEOPLE, BECAUSE THIS HAS ALL BEEN IN BLACK BOX.

IT'S ALL BEEN HIDDEN BY THE INSURANCE COMPANIES.

BUT THE QUESTION IS, AND IT'S A REAL ONE, HOW ACCURATE CAN WE BE ABOUT ANY INDIVIDUAL PROPERTY AND THEIR RISK GOING OUT 30 YEARS?

IT'S SOMETHING I THINK WE AS A NATION AND REALLY AS A WORLD ARE GOING TO HAVE TO STRUGGLE WITH.

>> IS THERE ANYTHING HAPPENING IN THE REST OF THE PLANET, OTHER COUNTRIES WHO ARE TRYING TO FIGHT OUT HOW TO APPROPRIATELY PRICE THIS, WHICH MIGHT KEEP PRIVATE INSURERS IN THE MARKET, MIGHT NOT HAVE TO HAVE THEIR FEDERAL GOVERNMENTS AS AN INSURER OF LAST RESORT?

>> WELL, THAT'S A WHOLE ANOTHER VERY INTERESTING QUESTION.

NO ONE IS AS HEAVILY INSURED AT THE UNITED STATES.

THE ONLY PEOPLE THAT COME CLOSE IS WESTERN EUROPE.

OTHER COUNTRIES WORK VERY MUCH ON A GOVERNMENT STEPPING IN MODEL.

BUT THAT'S BEEN CRUSHING.

IN PLACES LIKE PAKISTAN AND THE CARIBBEAN, WHERE THERE HAVE BEEN HUGE DISASTERS, THE GOVERNMENTS JUST DON'T HAVE THE MONEY TO STEP IN.

THEY'D LIKE TO SEE WESTERN COUNTRIES FOOT THE BILL.

WESTERN COUNTRIES HAVE SO FAR RESISTED.

SO THEY'RE BEGINNING TO SELL SOMETHING CALLED PARAMETRIC INSURANCE, OR CAP BONDS.

THESE ARE THINGS IF A DISASTER HITS A CERTAIN LEVEL, THEY AUTOMATICALLY GET A PAYOUT.

AND THIS IS CHEAPER FORMS OF INSURANCE.

BUT THE WHOLE WORLD WILL STRUGGLE WITH WHO TO CONTROL AND HOW TO PAY FOR DAMAGES AS THESE NATURAL DISASTERS GET WORSE AND WORSE.

>> LESLIE KAUFMAN, REPORTER FROM BLOOMBERG, THANK YOU SO MUCH.

>> THANK YOU.