CoStar: Property Owners Face Rising Insurance Rates With Mounting Losses Linked to Climate Change


Commercial property insurance rates are on the rise, spurred in part by billions of dollars in damage from floods and fires linked to climate change, posing economic challenges for some businesses and prompting investors to reassess purchases in areas where risk is increasing.

Mounting losses from flooding, tornadoes and wildfires, together with other macroeconomic factors such as rising inflation and supply-chain disruptions that are making construction materials and repairs more expensive, drove double-digit increases in commercial property premiums in 2021, according to an analysis from Chubb, a global property and casualty insurer.

Forecasts indicate even broader potential losses in coming decades could fuel more increases in insurance premiums or cause insurers to pull out of high-risk areas. Nearly 750,000 commercial buildings face a looming threat from deadly floods and rising seas alone related to climate change, according to a study by nonprofit environmental research and technology group First Street Foundation and global commercial engineering firm Arup.

Potential damage to local economies from the effects of climate change, an issue more in the spotlight around Earth Day, could increase to as much as $63 billion by 2052, according to the study.

“Insurers are getting rocked by climate disasters as insurance catastrophe losses increase, nearly 700% since the 1980s,” said Loretta Waters, vice president of the Insurance Information Institute, an industry group.

“Nearly 40% of the United States population lives in counties with coastlines, and stronger and more frequent natural disasters are destroying homes and businesses at record-breaking rates," Waters said during am April 14 presentation on commercial insurance issues facing small businesses by the Maryland Insurance Administration, the state's insurance regulatory agency.

Storms and tornadoes ravaging the East Coast and Midwest, massive wildfires on the West Coast and deep winter freezes nationwide caused nearly $57 billion damage to multifamily and single-family properties alone in the United States in 2021, according to a study by property data firm CoreLogic.

Investors Take Note

Landlords and investors with large commercial portfolios such as Chicago-based Heitman are taking a harder look at such data as sea-level increases and wildfire maps to factor in potentially higher costs before making real estate decisions.

Heitman, a global investment firm that oversees more than $50 billion in properties and other assets, has partnered with the Washington, D.C.-based Urban Land Institute to conduct investment research on how climate change, including the increasing risk of insured property losses and the future availability of coverage, is affecting property costs and values.

Heitman's acquisition teams have used the data to expand their due-diligence research to include potential red flags such as rising insurance and operating costs at vulnerable properties and how those factors could affect pricing if Heitman decides to sell the property.

"Insurance is repriced every year, and prices are not going to go down in the foreseeable future," Heitman Senior Vice President Laura Craft said during an April 6 webinar with ULI on climate risk and real estate investment. "That means increased expenses to the property. At what point does the price rise to the point where people migrate out of those areas because costs are so high?"

If insurers pull out of markets because of unacceptably high flood or fire risks, properties in those areas become less desirable as investments, Craft said.

"We're realizing that increased awareness of the data is allowing us to further underwrite risk, and understand what it costs to mitigate that risk," Craft added. "If our analysts are looking at a handful of deals, if some of them have climate risks, they're potentially skipping over those deals."

Properties in hurricane-prone cities with fast-growing populations such as Miami Beach, Florida, face the largest projected increases in structural damage from floods over the next three decades, according to the First Street-Arup study.

Such alarming data prompted Larry Richardson, a real estate agent in Delray Beach, Florida, to take up the cause of educating his clients about the dangers of rising seas when he noticed buyers purchasing property in flood zones without fully understanding the risks.

“I live in South Florida and I’m witnessing firsthand what sea-level-rise flooding can do to a coastal community,” Richardson told CoStar News. “All together, this will apply incredible pressure on the already strained insurance and mortgage markets in these communities.”

Property owners need to know how their governments plan to cope with flooding that could trigger sharp tax and insurance rate increases, he said.

“There’s also the danger that insurers and mortgage providers will stop offering their services, which would make selling their property nearly impossible,” Richardson added.

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