Well-to-do Brazilians are buying up luxury condos on the beach in Miami, The Times reported last week. "They are taking Miami by storm,” one real estate executive declared.

It's an unfortunate metaphor.

That's because, sooner or later, storms will likely damage or destroy much of the property on the Florida shoreline. And, while a beachfront real estate revival may be welcomed by developers who, according to the Times, are "starting or restarting ambitious condo projects," the risks are being borne not by the developers or by the condo buyers or even by private insurance companies but, for the most part, by a state-run, not-for-profit, tax-exempt corporation called the Citizens Property Insurance Company. Citizens has become the biggest insurance company in Florida since it was created in 2002, and many of its policies ($232 billion worth, according to a 2009 story in the Miami Herald, referenced here) are written on riskier, coastal properties. As a government-sponsored entity, Citizens has the implicit backing of Florida taxpayers who, you can be sure, will turn to the rest of us for help if the big one hits.

"Who’s on the hook when a wall of water hits the coast of south Florida? You and me," says Sharlene Leurig, senior manager of the insurance program at Ceres, a nonprofit alliance of investors and environmental groups. Her job is to raise awareness of climate risk within the insurance industry, and to prod the industry to respond.

It's not just a problem in Florida -- many states are assuming the risk of natural disasters, despite the rising costs of extreme weather events, which are more frequent and more severe because of climate change, scientists say. So is the federal government: The National Flood Insurance Program (NFIP) has $1 trillion in exposure, according to Ceres, and it's $20 billion in debt. Although no individual storm can be attributed to climate change, the rising prevalence and intensity of storms, floods, droughts and wildfires are consistent with what scientists say can be expected as global temperatures rise.

Today, I'm devoting the first of two blogposts to the insurance business and climate change. Have another cup of coffee if you must, but this is important. According to Leurig and a September 2011 report from Ceres, the insurance industry has yet to fully recognize the risks posed by climate change. This isn't just their problem. It's ours because what Ceres describes as he industry's "sluggish and uneven response to the ever-increasing ripples from global climate change" threatens not just the insurance business but the stability of the global economy.

The most pressing worry is the federal flood insurance program, which insures about 5.5 million homes, and the state-backed insurance pools that are underwriting seashore development. They're under political pressure to make insurance affordable and available. If this sounds familiar, it should: Fannie Mae and Freddie Mac felt political pressure to make housing affordable and available, and that didn't turn out so well.

More broadly, we depend upon insurance companies, acting in their own self-interest, to make the world a safer place. To avoid losses, insurers helped bring about fire safety codes for buildings and seat-belt laws.

They could be performing a similar service, by sounding an alarm on climate change, but they're not, at least not in the U.S. By contrast, big European reinsurance companies like Munich Re and Swiss Re have been among the loudest voices in the corporate world, calling attention to climate risks and urging action.

"The reason that Ceres works with insurance companies is that they have a unique ability to change the way we behave," Leurig told me.

In the U.S., insurers have responded to climate risk by excluding coverage or exiting markets. The federal flood insurance program was created in 1968 after Hurricane Betsy caused more than $1 billion in damages along the Gulf Coast. Private flood insurance was unavailable.

A 2010 report on the NFIP from the Institute for Policy Integrity at NYU Law School found:

• Because of its below-market insurance rates and the intense, hurricane-related floods in recent years, the NFIP has accrued a substantial deficit: $19 billion. [Now $20 billion] As currently structured, the program will not be able to repay this debt
• Since the NFIP cannot charge market rates, hold reserve funds, or purchase reinsurance, the program faces a constant financial risk of insolvency. The NFIP also causes environmental damage, by externalizing the risk of building in ecologically-sensitive floodplains.
• Those costs -- financial risk and ecological damage -- are widely distributed to taxpayers and citizens across the country.
• The benefits of the NFIP, by contrast, are enjoyed largely by wealthy counties and by a significant number of owners of vacation homes.

On the state level, special property insurance plans, known as residual insurance, have been set up by regulators to provide insurance in locations where the risk of severe storm damage is substantial. This is a classic example of moral hazard, where developers or homeowners take the risks but others -- the insurance industry as a whole, or taxpayers -- will be left with the bill if things go wrong.

A report issued last month by the Insurance Information Institute found that residual property insurance has grown dramatically over the past two decades:

Over the period 1990 and 2010, total exposure to loss in the residual property insurance market (FAIR and Beach and Windstorm Plans) surged from $54.7 billion in 1990 to $757.9 billion in 2010, which means that if all the policyholders insured by the two plans suffered a total loss, property damage claims would total that amount. Over the same period, the number of policies in force in the residual property insurance market went from 931,550 in 1990 to almost 2.8 million in 2010, a record.

It also said:

In July 2010 the Government Accountability Office (GAO) released a study that examined the condition of state natural disaster funds. Of the 10 state programs examined, the GAO found that six of the 10 charged rates that were not actuarially sound in that they did not accurately reflect potential losses.

Some government officials are addressing the problem. Florida Gov. Rick Scott has sought ways to shield taxpayers from the future claims that Citizens may be unable to pay. Louisiana's Citizens Insurance has been shedding policyholders, returning them to private companies. Alabama and Mississippi offer discounts to owners whose homes are fortified to withstand strong winds. The chart below shows that exposure peaked back in 2007, so the, er, tide may be turning.

Still -- the industry's losses from extreme weather are a big worry, or they should be. Just last week, Bloomberg News reported that "U.S. property and casualty insurers' profitability fell to the lowest level since 2008 as losses from natural disasters exceeded gains in sales and investment income."

Until the insurance industry and its regulators recognize climate risks -- and prices them into their products -- those losses are likely continue.

According to the Financial Times, no less an authority than Lloyd’s of London, the largest reinsurer of U.S. risk, said last fall:

"We don't believe that the U.S. has the balance between industry and government intervention right, you have government intervention in federal and state level, it demonstrates this is not a sustainable way to proceed," said Sean McGovern, Lloyds general counsel and the director of North America. He added: "The cost to the U.S. taxpayer is huge and is not sustainable."

Says Leurig: "People should understand just how risky their behavior is, and price has become a good way of communicating that risk." If the insurance industry, Florida real estate developers and Brazilian condo-buyers don’t pay a high enough price for the risk they are taking, the rest of us will get stuck with the bill.

Tomorrow: The eerie quiet of the insurance industry, on the climate issue.

Miami image via Shutterstock.