Property Insurance Is a Nationwide Challenge Now, and It’s Not Getting Easier

Yes, extreme weather is part of the problem. But there's so much more.

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The real estate and construction industries stand at the intersection of finance, politics, celebrity and government. But one thing that inexorably ties together this interplay of labor, land and money is the management of risk.

And, with the cost of that risk rising sharply, commercial real estate nationwide has been clobbered by the price of insurance.

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“This is a house on fire, and insurance is one of the first things my members talk about,” said Sharon Wilson Géno, president of the National Multifamily Housing Council (NMHC). Her members revealed in a recent poll that insurance for multifamily projects had soared 26 percent in the past year. “It’s impacting existing properties and new starts. It’s turning projects that were once viable upside down.”

A vicious cycle of revaluations of replacement costs, inflation, growing climate change risk, and rising material costs has made soaring insurance rates an unfortunate cost of doing business. Replacement costs for new construction projects lept 40 percent over the last four years, according to the Insurance Information Institute (III), and the ability to pay construction insurance premiums determines which projects get built. 

“The environment that we are now in is such that Section 8 housing is gonna get hurt, hospitals are going to get hurt, everyone is going to have a further increase in cost,” said Phil Corrigan, president of A.L. Carr Insurance Agency. “Typically, what you’d see in the industry is peaks and valleys, where you’d have a hard market where the prices are expensive, then a soft market where people can catch a little bit of a break. Today, the soft market really doesn’t exist.”

HUB International, an insurance broker for real estate, called today’s environment the “hardest insurance market in decades.” Rising operations and insurance premiums drive up rents on existing buildings, exacerbating our affordable housing crisis. Climate risk increasingly shapes where projects take root; the ripples of past disasters and the “everything, everywhere, all at once” sense of multiple storms and fires hitting the nation at once have driven up insurance payouts. 

David Lynd, president of San Antonio-based developer and investors the Lynd Group, told the Wall Street Journal late last year that insurance costs were inhibiting his plans to build more in Florida. So have so-called “nuclear verdicts” and huge liability payouts, which pushed insurers to be more conservative, said Chip Stuart, HUB International’s chief sales officer and North American real estate practice leader. State Farm famously abandoned writing new policies in California earlier this year, and Farmers Insurance pulled out of Florida in mid-July.

“The underwriting community has not yet wrapped their hands around the volatility in weather events, especially in places that historically haven’t had those types of weather events,” said Danielle Lombardo, chair of the global real estate practice at Lockton, the world’s largest privately held insurance brokerage.

Every building and policy is unique, said Géno, so it’s hard to provide a fixed, uniform percentage increase impacting the industry. But the rising cost in commercial insurance, which leapt 9.4 percent in 2022, per the III, has hammered high-risk, high-growth states like Texas, California and Florida, where it’s not unusual for the cost of policies to have increased 30 to 50 percent in some cases. Rising costs in general liability and criminal liability insurance are especially hard for the affordable space to afford, said Géno, since federal financing often requires specific amounts of insurance coverage. 

“A lot of the cost of developing housing is just time; time costs you money,” she added. “If you have to pull back and rethink insurance, and maybe restructure the whole thing, potentially at a higher rate, then that extra time itself could kill a deal.”

Every sector in commercial real estate is hurting. Numerous factors, particularly rising prices, have contributed to the current burden on builders and owners. But in talks with insurance brokers, analysts and developers, it’s clear a series of shifts over the last five years, parallel to the rise in billion-dollar natural disasters, has left the real estate industry with a higher price tag. 

After a number of serious and very expensive storms and fires in 2017 and 2018, including hurricanes Harvey, Irma and Maria, the insurance industry determined that it was time to re-evaluate premiums. Stuart estimates that during the period from roughly 2015 to 2017, the industry was taking in just $1 in premiums for every $1.10 it paid out. 

Up until that time, insurance carriers took a more relaxed approach to client-reported replacement cost values. Carriers evaluate their exposure based on the cost to rebuild, so these values have a direct correlation to premiums.

That changed after 2017, when losses from the historic run of megastorms showed insurers they were not getting enough premiums for their exposure. The scrutiny on replacement cost values has increasingly become a point of focus for underwriters, adding to an already difficult property insurance market. Lombardo estimated the replacement cost values have jumped as much as 60 percent just to correct the rampant underestimation of replacement costs. 

The inflationary impact of increased material and labor costs combined with supply chain issues has increased claim payouts beyond what underwriters expected or collected premiums for, in addition to rises in general property rates. Hurricane Ian, which the III estimated cost $60 billion when it hit Florida in late 2022 due to more building and more people in the affected areas, would have been a $40 billion storm a decade ago. 

At the same time, the insurance industry has functioned with reduced capacity due to ballooning payouts. Losing companies to specific high-risk markets puts more strain on those willing to participate in the exposure, which eventually causes prices to go up, and leads to further scrutiny on asset valuation. Increasing costs, associated with more costly storms, have meant higher rates and even firms pulling out of more exposed markets. 

Hurricane forecasts expect sizable storm events and payouts, but increased incidences of more unexpected damages — everything from ice storms in Texas to Midwest and interior New England flooding to smoke damage from Canadian wildfires — means larger than expected insurer payouts, less capacity for new policies, and a scramble for building owners to find affordable rates. After Hurricane Ian hit Florida, the reinsurers — who provide insurance to insurance, and saw 40 percent increases in their costs last year, per the III — began pulling back, meaning less overall coverage. 

“More insurance is needed, and fewer insurers are offering it,” said Lockton’s Lombardo. “Insurance companies that are offering it tend to operate in all states, and around the globe, so they look at their book of business and think, ‘Why would I want to write this policy in Texas or Florida?’ ”

The rising cost of risk, in fact, may be encouraging more risk taking. Existing buildings and venues may opt to take out more minimal policies — meaning higher costs in the event of a disaster. And, in today’s shaky loan market, lenders are demanding insurance that covers all the replacement costs of a project, a massive hurdle for projects seeking to break ground, especially for pricy coastal real estate. Some projects and buildings will be forced to go to non-admitted carriers, who don’t make their rates public, and pay exorbitant fees, even paying numerous brokers to cobble together a comprehensive policy.

“Insurance is integral to the banking industry, it’s essential to make anything move, to make anything get closed, to make buildings get sold,” said A.L. Carr’s Corrigan. “​​Insurance has been around since the first ship sank, when Lloyd’s of London started going to work. You have to have it, but it comes at a cost.”

Lombardo, Stuart and others have floated solutions, including detaching specific catastrophe insurance coverage from standard insurance policies. Lombardo believes this can lower some of the extraordinary premiums placed on, say, Florida coastal real estate and provide coverage at a price that doesn’t prevent a property from generating income. For instance, in California, buildings have separate earthquake and general insurance, lowering the cost of the latter. Doing the same with wildfire insurance might further reduce overall costs, says HUB’s Stuart. Insurers would “come running back” to the state.

Others have hoped for more federal help. After 9/11 there was federal intervention around terrorism insurance, and the federal government is intimately involved in flood insurance. More government engagement will help keep dealmaking from grinding to a halt. Insurance has increasingly become a social issue, said Lombardo, as rising costs will hamper the ability of high-growth areas to build and keep up with population growth. There’s an argument to be made that government backing of multifamily insurance is a social good. 

Mark Friedlander, director of corporate communications for the III, insists the insurance industry is well capitalized and prepared for future risks. Getting property and projects protected by the industry’s umbrella, however, has become a limiting factor, and few industry executives expect the storm to pass anytime soon.

“While we used to just kind of wait for that correction to happen in the insurance markets,” NMHC’s Géno said, “I think this situation is here to stay.”