Rising Risk, Rising Premiums – Oct. 28, 2024
A few weeks ago, we reported on a study from GIC and S&P Global that focused on the long-term implications of climate hazards for owners of real assets. One of the potential impacts, naturally, was cost.
Consider the back-to-back hurricanes Helene and Milton in late September and early October. The latest estimate of storm damage from Helene exceeds $50 billion for western North Carolina alone, and although Milton’s impact was less severe than originally projected, it may have resulted in an additional $34 billion of damage, according to CoreLogic. The CoreLogic estimate is only for the hurricane itself, never mind the nine tornadoes it spawned.
Yet extreme weather events can exert a detrimental effect on the bottom line right now—even if they don’t actually occur. The reason: the rising expense of insurance.
Offsetting the risks of damage from flooding, wind or wildfires is just one reason that commercial property owners are finding their NOI reduced as insurance costs increase, the Urban Land Institute (ULI) and Heitman say in the fifth of a series of reports on climate risk. Expensive and scarce reinsurance, persistent inflation, regulatory restrictions and the higher frequency of weather-related claims are driving up property insurance prices, impacting commercial real estate returns, valuations and transactions.
Partly that’s because, as the report states, “Higher insurance costs are also influencing investor behavior. While markets with higher climate risk are not off the table for investors, investors are carefully considering individual asset exposure, the likelihood of losses over the hold period, and the risk appetite of future buyers, as well as evaluating asset vulnerability and investing in risk-reduction strategies.”
In addition, investors relying on financing may now face strict covenants from lenders regarding the terms of the insurance in place. The ULI/Heitman report, Insurance on the Rise: Climate Risk and Real Estate Investment Decisions, highlights strategies for securing affordable insurance coverage, investment considerations that may make a building or portfolio more attractive to insurers and emerging trends that could reshape the market.
“Natural catastrophes are costing the global insurance market tens of billions of dollars, contributing to rising property insurance premiums and introducing new levels of uncertainty across the commercial real estate market,” said Lindsay Brugger, VP of urban resilience at ULI. “As extreme weather events increase in frequency, intensity, and cost, a property insurance policy can no longer be real estate’s sole risk reduction strategy. Strategic management of physical climate risk must be part of the solution.”
To manage rising costs, Insurance on the Rise considers a two-prong approach that pairs creative insurance solutions with a risk-aware investment strategy:
- Creative insurance solutions include stitching together coverage from multiple insurance carriers, opting for higher deductibles or aggregate deductibles, employing self-insurance, self-insured retentions, or captives, and leveraging parametric and/or excess and surplus line coverage.
- Risk-aware investment strategies that examine portfolio size and geographic diversity, asset and market exposure to physical climate risk, asset and construction type, and asset scale resilience measures can facilitate strategic portfolio construction to better navigate insurance implications.
The research further highlights emerging trends stemming from the single-family homeowner market that could have implications for commercial real estate. These include the possibility of insurance-driven migration, the growing insurance protection gap and the solvency of government-backed insurance programs. Click here to access the full ULI/Heitman report and its four predecessors in a series that began in 2019.