Insurance has always been one of the significant and unavoidable costs involved in commercial property ownership. Owners in areas prone to extreme weather events know their insurance rates are going to be comparatively higher. But something changed several years ago in the commercial property insurance market. In 2017, rates began to go on a steady upswing, and they haven’t stopped. Of course, the cost of everything is on the rise in this inflationary climate, but the hardening of the commercial property insurance market has been more pronounced. Premiums increased by 20.4 percent in the first quarter of 2023, according to The Council of Insurance Agents & Brokers, marking the first time since 2001 that premiums rose more than 20 percent. There are concerns that climate change, contributing to higher temperatures and more frequent extreme weather events, is a contributing factor. Regardless of the cause, the surge in costly property disasters has prompted the insurance industry to respond by scaling back policies in certain areas.
For qualifying commercial property owners, traditionally, the main issue with property insurance has been the cost of coverage. Now, for a growing number of property owners in natural disaster-prone locations, the issue will be whether they can obtain insurance coverage at all. With little public fanfare in late 2022, leading insurer Allstate announced that it would halt new commercial and residential insurance policies in California, a state that has continued to struggle with expensive wildfire property damage. Several months later, in May 2023, insurance giant State Farm followed suit, announcing it would no longer accept new residential and commercial property applications for policies due to historic increases in construction costs outpacing inflation, a challenging reinsurance market, and rapidly growing catastrophe exposure.
There’s been no word on application restrictions from Farmers Insurance, and it’s unlikely that the company will jump on the bandwagon after having become the first U.S.-based insurer to sign on to the United Nations-convened Principles for Sustainable Insurance Initiative, which of course involves a commitment to incorporate ESG standards into its business, in 2022. Still, as extreme weather events like hurricanes, floods, and fires become more expensive, Allstate and State Farm probably won’t be the last insurers to cease offering coverage in certain markets.
Despite Allstate and State Farm’s actions, for the time being, the sky isn’t falling for California property owners. Other insurers continue to offer coverage. However, there is a trend afoot. The growing number of destructive weather events are leaving insurers struggling to cover the devastation. In 2022, commercial reconstruction costs increased in all 50 states, with Florida experiencing the largest increase at 10.1 percent, as per research from analytics and risk assessment firm Verisk. The stakes are incredibly high. There are approximately 3,000 miles of U.S. coastline at risk along the Atlantic shoreline and the Gulf of Mexico, with the value of insurable property totaling in excess of $13 trillion, according to risk modeling solutions provider Air Worldwide.
The problem isn’t limited to geography, as certain property types are experiencing particularly severe insurance challenges. ReShield, an insurer for high-growth real estate portfolios, reported that the multifamily sector has logged insurance rate increases in the double digits as a result of the disparity between previous replacement values and today’s astronomical costs for rebuilding. Furthermore, climate change’s impact on the insurance sector is not solely a domestic concern. New Zealand-based real estate company Stride Property Group reported in its 2023 sustainability report that even in a scenario in which significant decarbonization policies are enacted immediately, there is a moderate chance that subsequent consequences will include the inability to obtain insurance coverage in certain areas or for specific risks.
As individuals construct pricier residences and businesses in areas prone to disasters, we will encounter growing difficulties in obtaining insurance, with exorbitant premiums and escalating deductibles. Consequently, property owners will be compelled to transfer a portion of the elevated expenses to tenants through increased rental rates. While this approach might work in high-demand property sectors such as industrial, it is impractical for the office market, which continues to struggle with occupancy. Moreover, certain property owners may face the outright inability to acquire insurance. If the notion of being unable to secure property insurance seems far-fetched, one only needs to look at the Bay Club Apartments in Bradenton, Florida. News emerged in May that the owner of the 288-unit property, which has suffered a series of floods over the last several years, is unable to find an insurer that will replace its expiring insurance policy.
While authorities around the world are committed to efforts to understand and mitigate climate change, it’s unlikely that even the most extraordinary accomplishments will lessen the increasing number of expensive weather events in the foreseeable future. It’s a situation that will likely leave more insurers unable to absorb the substantial losses. The property market can’t function with uninsured properties (without insurance, buildings can’t operate legally) so it will likely take some sort of legislative intervention to prevent more commercial properties from becoming uninsurable.
Outside of new laws restricting pricing or mandating companies to provide minimal coverage, the future of property insurance may require the insurance industry to spawn a new sub-industry. Like car lots that will finance buyers with less-than-stellar qualifications, there is a small segment of property insurers that have programs for those who can’t find coverage through traditional insurers. Florida’s Citizens Property Insurance, a state funded company whose mission is to serve as the Sunshine State’s “insurer of last resort,” is one such organization. In March 2023, California’s insurance commissioner announced that the California FAIR Plan Association would double its existing commercial coverage limits for businesses that are unable to procure policies in the traditional marketplace. Action in both the public and private sectors may be the requisite combination for thwarting a wave of uninsurable properties.