Listen to Buffett and Powell: It's good to be a large financial institution

People and local governments are in for a rough ride when it comes to the intensifying physical risks of climate change

Large U.S. financial institutions know that—whatever the politics of the moment—the accelerating effects of climate change will have significant economic consequences. They are managing this risk by avoiding it.

A dozen or so years from now, large banks won't have branches in risky areas and will stop writing loans there. Large insurance companies will continue to evaluate each year whether it is worthwhile to stick around, will continue to exit markets that don't pencil out, and will do their best in the meantime to avoid liability by parceling it out to rickety affiliates that they can cut loose as needed.

What's fascinating about this picture is that smaller elements of our financial system that have a physical presence in risky areas are far slower to recognize and reduce climate risks.

Over time, the ravages of climate change may emerge as a threat to the overall financial stability of the country. Long before then, though, much of the risk will have been shifted to the shoulders of people and entities who are far less capable of bearing it: smaller geographically concentrated businesses, individuals who cannot or do not want to move, and local governments.

Just ask Warren Buffett and Federal Reserve Chairman Jerome Powell. Both great communicators, they told the world during February 2025 that they were taking climate change seriously. Neither thinks large financial institutions face much risk. State and local policymakers and residents of risky places should pay attention: The implicit message is that they will be on their own.

Berkshire Hathaway Chairman of the Board Buffett, now 94, says he plans to be on stage for a few hours during the annual shareholder meeting in May—beginning at 8am. He's still got that folksy, calmly prosperous tone, claiming that his sister Bertie, 91, is likely to be "surrounded by males" at the meeting. "The scene will bring back memories of Scarlett O'Hara and her horde of male admirers in Gone with the Wind," he wrote in his recent letter to shareholders.

Berkshire's substantial interests in insurance spun off $9 billion in underwriting profit in 2024 and nearly $14 billion in investment profit—an increase of 66 and 43 percent, respectively, over 2023—and Buffett's continued affection for the "float" that the insurance business provides is on display in this letter. In his words, the insurance industry's “'money-up-front, loss-payments-later'” model has allowed Berkshire to invest large sums ('float') while generally delivering what we believe to be a small underwriting profit." (I wrote about the float here.) Sure, underwriting risk is profitable, but it's the float at Berkshire that has grown over the past two decades from $46 billion to $171 billion. That's a lot of cash to invest.

Berkshire is selling off stocks these days ($134 billion in 2024), shedding interests in Bank of America and Apple, but its enthusiasm for insurance is undimmed. This language sounds almost gleeful: "The float is likely to grow a bit over time and with intelligent underwriting (and some luck), has a reasonable prospect of being costless." Costless float! Sublime.

That's why it's worth noticing that Buffett wrote this:

"[I]nsurance pricing strengthened [went up] during 2024, reflecting a major increase in damage from convective storms. Climate change may have been announcing its arrival. However, no 'monster' event occurred during 2024. Someday, any day, a truly staggering insurance loss will occur—and there is no guarantee that there will be only one per annum." [emphasis in original]

It's a sober note in an upbeat letter. It's a calm apolitical acknowledgment that climate change presents dramatic physical risks to Americans.

But it's not aimed at driving investors away from the insurance holdings that brought Berkshire a "major increase in earnings" in 2024. Far from it. Buffett's larger point is that insurance companies depend on the presence of risk ("No risk—no need for insurance") and that premiums can go up as hurricanes, tornadoes, and wildfires arrive and wreak havoc. Insurance, he is saying, is a great business, because these risks are made manageable by the tradition of one-year contracts and the sizable mountain of float and cash and wherewithal holding Berkshire aloft. In the context of climate change, he says, it would be "madness" to write ten-year policies. He notes that six-month car insurance contracts have allowed "more intelligent underwriting"—in other words, more optionality to drop coverage when it makes sense to do so.

It's full steam ahead for Berkshire when it comes to homeowners insurance, as long as its companies "never [italics his] write inadequately-priced policies in order to stay in the game" or commit to staying around longer than they want to.

Fed Chair Jerome Powell made a similarly matter-of-fact set of statements about the effects of accelerating climate change earlier this month. During a Senate Banking Committee hearing on February 11 , he said that he was seeing the same insurance and mortgage crisis that everyone else is:

[B]oth banks and insurance companies are pulling out of areas, coastal areas and things like that or areas where there are a lot of fires. So, what that is going to mean is that, if you fast forward 10 or 15 years, there are going to be regions of the country where you can't get a mortgage, there won't be ATMs, there won't—the banks won't have branches and things like that.

That's a possibility coming up down the road. It's not that the banks will stay there and keep making loans in the face of evidence of disaster, or that insurance companies will do—[will] write policies. They can cancel those policies every year. So, I think the risk is that they just won't be there, and that people won't be able to get them.

Powell is careful to say, however, that he doesn't see an urgent financial stability issue stemming from climate's effects. When pressed by Sen. Tina Smith (D-MN) as to whether this "down the road" set of issues he had described would be a "massive source of instability in our economy," Powell responded:

I think it's going to fall—if that happens, it will fall on homeowners and residents, but it will also fall on state and local governments, which is what you see happening now where they're stepping in, in states where insurance is going away. Private insurance. You're seeing states step in because they want those areas to remain prosperous.

So, I don't know that it's a financial stability issue, but it certainly will have significant economic consequences.

And Powell doesn't think that large banks will be rocked by physical effects of climate change. In a hearing the following day before the House Financial Services Committee, Rep. Sean Casten (D-IL-06) asked where the risk being shifted away from insurance companies was going. Powell's response mirrored what he said the day before—the risks would fall on homeowners and state and local governments—and, he added:

But they [transferred risks] don't fall on—they don't—they don't cause large financial institutions to fail.

Why? Because large banks are so large, so diversified in so many ways, that even if there are a slew of defaults on mortgages triggered by rising insurance premiums and costs of damage caused by increasingly ferocious weather events, they will be fine. Even if property values, both residential and commercial, plummet by 35 to 40 percent, even if there is a severe global recession, these major institutions will keep ticking along. That's how big they are.

Both of these financial leaders are acknowledging, implicitly, that decay and turmoil triggered by the physical effects of climate change are likely to be experienced by smaller, less-well-financed entities and individuals. A smaller insurance company not protected by the golf-course-size umbrella of Berkshire or backstopped by a national brand might need to stay in the game despite rising risks, might be encouraged by state regulators to stick around, and might suffer insolvency more readily.* The Fed stress tests of the 31 big banks did not include regional banks that are likely to hold more geographically-concentrated loans, including for risk-laden commercial properties.

It's a complex story. Banks and insurance companies are not inherently "bad" or "good," but some, particularly the larger ones, are better prepared for coming physical risks than others. Homeowners, renters, local governments? Not so much. And the federal government is not coming to the rescue.

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* Lawrence Mower of The Tampa Bay Times reported this week https://www.tampabay.com/news/florida-politics/2025/02/22/florida-insurance-profits-desantis-regulation-investors-crisis/ that insurance companies in Florida appeared to be financially engineering loss-ridden affiliates while reaping substantial profits.