Owners and lenders are prone to underestimate the rising price of insurance coverage

Natural disasters and migration to higher-risk areas are driving insurance premiums high, with investors and lenders underestimating future price increases, according to a report from real estate services company SitusAMC.

An increasing number of claims and a dwindling number of insurance carriers are contributing to an increase in coverage costs, even in areas less affected by natural disasters. The combined headwinds can result in sticker shock beyond the first year of insurance for investors, lenders and homeowners alike. Increased premiums can also lead to certain properties being overvalued if the cost increases are substantial enough, according to the report entitled "Weather in the Storm: Burgeoning Property Insurance Costs".

"Most people may not be surprised to hear that insurance prices are rising, but few understand how precarious the situation is for the insurance industry," said Jennifer Rasmussen, PhD, Vice President and Head of Thought Leadership and Publications at SitusAMC Insights. the co – wrote the report.

"As climate-related disasters rise, many homeowners and residential real estate investors could face a rude awakening in the years to come," she said in a press release.

According to the USI Insurance Services mid-year 2021 market update, premiums for properties outside of disaster-prone zones are expected to increase by 5% to 10% each year, while properties within those zones, such as 10% to 15%. However, many appraisers calculate only 3% annual increases for renewals after the first year, well below what current trends are likely to require.

"Tenants and owners often fail to understand or anticipate the complex factors that drive property insurance costs so quickly," the report said.

Recent natural disasters and other climate-affected events, such as the condo collapse in Surfside, Florida, have highlighted the increased risk climate for insurance providers in certain parts of the country. Winter storms in Texas accounted for 40% of claims in the US property insurance market in the first half of 2021. Nevertheless, the population in the areas hardest hit by such disasters, namely in the west and southeast of the states, continues to grow rapidly, with property insurance costs playing a large role in this.

Data from the First Street Foundation found that some of the most popular travel destinations for new residents in 2020 are at increased risk of flooding over the next three decades, accounting for approximately 1.2 million residential properties and 66,000 commercial units. Drought-hit regions at risk of forest fires have also seen an influx of newcomers that have spread well beyond the city centers, increasing the risk of property damage.

"The experience from California suggests that as the population increases, residents move further and further away from the subway core in search of affordable space," the report said. “The urban sprawl is adjacent to the development with vegetation and fire-prone areas, which increases the likelihood of a fire. Soon around 35 million people in four states – California, Texas, Arizona and Nevada – will be living in fire-prone areas from this exurban foray. "

The greater risk to private providers in some markets has resulted in some leaving or reducing their presence in states like California or Florida, reducing the number of more affordable options and making their residents more dependent on government policies. State insurers in North Carolina, Massachusetts, and Kansas have also taken on an increased burden of insurance policies since 2013.

To mitigate much of the risk associated with disaster-prone areas, some property insurers may turn to reinsurance policies as a protective measure to mitigate potential damage from disasters. But the reinsurance industry has been suffering from losses for years, among other things due to a larger number of natural disasters in the last half decade, according to the report. In turn, reinsurance providers passed their cost increases on to insurers, hampering the ability of small insurers to serve customers.

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