Climbing insurance rates are being felt by homeowners and real estate investors across the country, in some areas more than others. As insurance becomes more expensive, property owners can’t help but ask themselves what they can do to cut costs in this insurance market. To answer those questions and more, we have Jason Jones in the room today.
Jason Jones is the SVP of Risk Management at NREIG. He holds a Bachelor’s in Arts and Science from the University of Missouri, Columbia, and a Master’s in Information Systems from the University of Phoenix. With an insurance career spanning over 20 years, most of his industry experience was gained through his role as an adjuster, primarily handling property and liability claims with various companies. Throughout Jason’s time at NREIG, his various leadership positions have exposed him to almost every department, including client service, claims, client account review, underwriting, and risk management.
Why are property insurance premiums rising at the rate that they are right now?
There are a ton of reasons why if you kind of dig into it. But the larger parts of that are an increase in extreme weather events, labor and material shortages, and inflation. That’s just kind of perpetual and we’re seeing that across the entire country.
How does extreme weather impact the insurance market?
The extreme weather events along with the labor and material shortages and inflation, have a huge impact because when you have one loss, that loss cost in 2000 then turns into a larger loss cost in 2024. We are seeing a larger frequency of these types of losses. We have more hurricanes, more tornadoes, more wildfires, floods, etc. than 20 years ago. Ultimately, there are more losses and there’s an increased cost of managing the repairs. The data we researched showed the average number of billion-dollar losses 10 years ago started at say 10 and to this point, we’ve pretty much doubled that amount.
The most expensive weather events are hurricanes. You’ll see those mostly in Florida, Texas, and Louisiana – those sorts of areas along the coast. But we did see one here recently in California. Overall, the weather is more volatile in general and that’s also creating some issues for the insurance market as it struggles to keep up.
You also have wildfires, which typically are going to be California and Colorado, but they’re expanding to other states. Now, you see them in Oklahoma, parts of Florida, and all over. The causes range from a simple car fire due to overheating on the side of the road to the typical littering of cigarettes and even falling power lines.
So, when the number and severity of natural disasters increase, the amount and cost of property insurance claims rise because insurance carriers must keep up with payouts.
What’s the response from carriers with the increase in natural disasters?
The carriers by and large are taking a closer look at where they’d like to ensure locations. You see a lot of the carriers pull away from areas that are more prone to those weather events, like Florida. Louisiana is another example. There’s just been so much devastation there due to hurricanes and flooding. So, the actuaries are having a field day trying to figure out why their rate and deductible structure are not working in those areas. Because they’re not profitable. In response to that, you’ll see an increase in standardized deductibles, an increase in rates, and then carriers pulling out of areas altogether just so they can remain profitable and viable for other areas in the country that they insure.
How do labor and material shortages impact insurance premiums?
Construction costs have surged over the past few years due to a shortage of skilled labor. There’s been a struggle to retain and find some of those skilled workers, which has forced construction companies to charge more for labor. In addition to those increased material costs, the supply chain disruptions associated with COVID also led to delays in construction materials and scarcity of items that people had become used to having available to them.
Now, natural disasters have further impacted supply and demand, making it even more difficult for construction workers to keep up. So, you’ll see a lot of contractors out after a widespread hail or hurricane loss, etc. and they’ll be in a position where they can pick and choose what job is going to be more profitable for them. Those delays create issues for insurance companies because they have to pay more, find more options, or work with clients who have decided they are going to do the work themselves. After all, they can’t find anyone, or they are tired of waiting. I think we understand that not everybody’s built to do it themselves, which causes more issues down the road. But delays aren’t any better because when tarps are on roofs for months and months, more damage is created on top of it.
Overall, the shortage leads to other issues that create increases in cost, including paying more for claims because no one’s able to get out there and repair damages.
So we know inflation creates a cycle of rising costs across all industries. But is the insurance industry any different?
No, it’s the same thing going on everywhere. You’ll see the cost for an employee at your local department store increase because there’s a shortage of labor. Because the way to get and keep more employees is to pay them more. Insurance companies, like everyone else, are trying to evaluate how to manage their costs because they have employees and other expenses to pay. That all goes into how they evaluate their risk. It’s all kind of a cyclical thing and the insurance industry isn’t immune to that inflation.
What areas are really feeling these rate increases and why?
I think the easy answers for this one are Florida and Louisiana. It’s easy to see that with the number of hurricanes and the issues they cause. It’s a ton of money to maintain insurance down in those states. Insurers are paying billions or millions of dollars for each hurricane event that happens. That’s why premiums go up so much for those areas, especially over a few years. That landscape has changed enough that either carriers become insolvent and haven’t been able to keep up with the changes there or they’ve made a business decision to move out of some of those areas.
Then there are also areas like California, where you have the cost of living that plays a big factor. I think we can all understand that living in, say, Kansas or Missouri is probably a different experience than living in California. The wildfires that have kind of plagued that area for the last decade or so have caused a lot of carriers to rethink how they want to manage their portfolio or their book of business. A lot of them have tried increasing deductibles and rates, but it hasn’t worked out for them. So, they moved out of that area.
You’ll also see some areas where there’s a little bit more crime – theft, vandalism, fires, that sort of thing. Detroit is one of those areas. There is quite a bit of challenges when it comes to theft and vandalism, but there’s also a lot to be insured. If you can find the right way to insure it, there’s an opportunity for insurers. It comes down to the insurance companies identifying what those risks are and then setting some parameters so that they can still maintain business in that area. For example, one of the carriers that we’ve worked with, they’ve set a standard for Wildfire scores. If the scoring has been evaluated as bad in that area, then we either move to a super high deductible or we cannot insure it.
Those types of strategies are in play in a lot of areas in the country to make sure that there’s (1) insurance for people who need it, and (2) that the insurance company is still going to be there after a loss occurs.
We know that investors can’t control the weather, but what can they do to keep their insurance costs manageable?
There are quite a few things that insureds can do to kind of keep their costs down or at least understand what they’re dealing with. The first is just to shop for insurance. When renewals come up, you can look and see what the insurance market is doing. There may be a company that has found a niche area that fits into the box of insurance that you’re dealing with. If you make a change, evaluate all coverages the same way. Some of the price savings could be a function of you losing coverage.
Additionally, keep your properties well-maintained. That is a huge one. A well-maintained property is less likely to experience costly damage. By keeping up and managing that property, you’re able to identify losses a lot sooner. Say you do your property evaluation every spring and see there’s a small leak, which means you can fix it before it creates a bigger issue and results in an insurance claim.
Also, you can require tenants to retain their own Renters insurance. They’re going to want to protect their own items. And if a tenant’s action leads to a loss, your insurance company may be able to seek reimbursement from the tenant’s policy, which helps keep your rates stable.
Using an independent broker or agent can give you access to other types of coverage. Brokers or agents representing multiple insurance companies can find the most comprehensive coverage at a competitive price. This also gives you a chance to evaluate your coverage. Maybe you’d like to add coverage, like Service Line. You understand that a smaller amount now can save you a larger amount later.
— Game Segment: Fact or Fiction —
Fact or fiction? Over the past five years, the US has experienced an average of 10 billion-dollar natural disasters per year.
That is fiction. Over the past five years, we’ve had an average of 18 billion-dollar natural disasters per year. So quite a bit more.
Fact or fiction? About 1 in 50 insured homes have a claim each year.
Fiction. The statistic is actually 1 in 20.
Fact or fiction? As of 2022, the average wildfire insurance claim paid is $224,000.
Fact. That’s an 8% increase from 2021.
Fact or fiction? California, Oregon, and Colorado make up 95% of wildfire claims paid by insurance companies.
Fact. Those areas are more prone to wildfires. There are areas like Texas and Oklahoma that are starting to become a problem but that is a fact.
Fact or fiction? More than 31.7 million single-family homes (and nearly 1 million multi-family homes) are at moderate or greater risk of being impacted by damaging hurricane winds.
That is a fact. More than 22 million single-family homes and over 647,000 multi-family homes are at high or great risk of hurricane and wind damage.
Watch or listen to the full episode here!
Sources:
- https://www.forbes.com/advisor/homeowners-insurance/natural-disaster-statistics/#:~:text=Jefferson%20Parish%2C%20Louisiana.-,How%20Many%20Natural%20Disasters%20Occur%20Each%20Year%3F,dollar%20climate%20disasters%20per%20year
- https://www.iii.org/fact-statistic/facts-statistics-homeowners-and-renters-insurance
