Originally published in REI Ink Magazine.
If I could sum up the property insurance market in one word, it would be chaos.
If you have been an investor for the last couple of years, you have undoubtedly had a challenging property renewal for your portfolio. You may have dealt with required increases to insurance value or experienced premium increases (or both) regardless of your loss history or account profitability. The last couple of years have been challenging, and it does not look like the next 12 to 24 months will be any better.
Before Hurricane Ian hit, Florida homeowners were already paying the highest premiums in the country — nearly three times the national average. The state is increasingly difficult and expensive to insure and claims from the recent hurricane will only continue this trend.
The aftermath of COVID is still being felt in the United States: rising interest rates, rising inflation, rising material costs, and almost every industry is experiencing labor shortages. These higher material costs and labor shortages are affecting claims payouts for carriers. This may lead to rate increases and even canceled policies or carrier insolvency. Additionally, longer repair periods leave investors missing out on potential rental income.
Contrary to popular belief, hurricanes and tornadoes are not occurring more frequently. They are, however, more severe. NASA reports that global warming has caused seas to rise, leading to a higher storm surge and resulting in more intense rainfall and an increase in coastal floods.
Even though the total number of tornadoes per year has remained relatively stable, recent years have shown changes in their patterns. Tornado events are becoming more clustered, and evidence suggests that tornado patterns have shifted geographically. The number of tornadoes in the states that make up Tornado Alley continue to fall, although tornado events are on the rise in Mississippi, Alabama, Arkansas, Missouri, Illinois, Indiana, Tennessee and Kentucky.
Wildfires have been occurring in new territories as well. These fire events are largely taking place in areas of the country that, historically, have been lower for insurers, and therefore were afforded lower insurance costs. Property rates in Western states are a fraction of what they are in the Midwest or Southeast.
Unfortunately, just one extreme event can drastically affect a carrier or program’s profitability, causing them to halt business in these areas.
Catastrophes Drive Up Property Rates
According to National Centers for Environmental Information, there were 20 individual billion-dollar weather and climate disasters. What stands out is the diversity of disasters: a winter storm across the deep south and Texas, a wildfire event impacting seven states, flood events in California and Louisiana, tornado outbreaks, etc. And let’s not forget Hurricane Ida, the most expensive hurricane to make landfall in Louisiana since Katrina in 2005.
2022 did not provide any relief for these property markets. The same triggers were seen across the globe again this year. And just when we thought we would make it through the hurricane season without significant landfall in the United States, Hurricane Ian hit Florida. Damage estimations range from $42 to $258 billion.
The insurance market trend we have seen in Florida over the last few years will continue as claims arise from the hurricane.
Climate catastrophes have driven up property rates for everyone, regardless of geographic location or individual loss history. Why are we seeing this trend? Reinsurance carriers are increasing their reinsurance rates for primary insurers. Unfortunately, primary insurers (your carriers) then pass that cost on to the end buyer, which is all of us.
The aforementioned factors all contribute to what is shaping up to be a chaotic 2023 property market. Although situations will differ, initial numbers for 2023 renewals show a 30-35% increase in property insurance costs on clean risks. “Clean” means your portfolio has had no property losses and is not located in a region prone to catastrophes such as wildfire, hurricane, or convective storm areas.
If you have had losses and/or your property is in a catastrophe-prone area, you could potentially see a 60-70% increase on your property this upcoming term. We are experiencing a hard property market, and in times like these, you should always shop annually for your insurance. You will get much more out of shopping for benefits, policy structure, and included coverages than you will for price. There is not that much fluctuation between property carriers. The most you can save is pennies on the dollar.
Insurance agents that are selling on cost alone are struggling right now. Those that can find benefits and comprehensive coverage for the same cost are of more value to you.
A good insurance agent will work with you to find ways to keep your costs stable. If you are comfortable taking on a little bit of additional risk, you and your agent can look at increasing your property deductible, changing your policy form from Special to Basic, and switching to actual cash value coverage instead of replacement cost coverage.
Remember, if any of your properties have a lender, you will be required to stay within their insurance lending guidelines. You must check with your lender and insurance agent before you make or request these changes and understand any added risk. Your insurance agent should be an expert and be able to guide you in the right direction while providing you with the positive and negative implications of any changes to your property policy.
I also stress the importance of being as proactive as possible with your renewal. Do not wait until the last minute to aggressively shop your coverages and costs, as markets will be limited. Your agent should certainly be ahead of this, but if not, you need to make sure they start shopping your renewal 60 days out. Lenders start requesting renewal proof of coverage from your agent around this time as well.
As an investor, you want the best terms, applicable benefits, and the broadest coverage form. In a hard market, this will be to your advantage.
For the next couple of years, the best piece of advice I can give anyone, is to stay out in front of it. Be in constant communication with your insurance agent to be sure you are getting the most for your money in this hard property market.