- Insurance premiums are rising in many states following multiple weather disasters.
- The crisis is changing both residential and commercial real estate markets, as deals fall through due to the cost and availability of insurance.
- Because the impact varies from state to state, insurance issues are changing the competitive landscape.
An insurance crisis that sent premiums soaring and sent carriers fleeing coastal states like Florida and California is spreading and fundamentally changing the housing market in states across the country.
“Not only is the cost higher than people anticipated, but just not being able to get insurance causes deals to fall through before they even happen,” said Bill Baldwin, owner of Boulevard Realty in Houston.
Increasingly, Baldwin said, he and other brokers are seeing insurance companies step in just as deals are about to close, making nearly impossible demands.
“A new roof, for roofs that are only seven or 10 years old. They want to cut down trees that are within 20 feet of the edge of the house. Often times, those trees are on the neighbor’s property,” he said.
“And when that’s not possible, you can’t get insurance, which causes the sale to fail.”
A similar dynamic is playing out in commercial real estate, said Ross Markowitz, director of insurance risk management at AEW Capital Management, a global real estate investment advisory firm based in Boston.
“We really need to train our internal teams,” he said. “Don’t expect your buyers to be able to get the same insurance price as we do, they’ll probably want to offer less for the deal.”
Insurance losses are piling up
The new momentum comes after several years of huge losses for the insurance industry from natural disasters, including nearly $80 billion in insured losses last year alone, according to the Insurance Information Institute.
“It’s directly related to climate risk,” said Jeremy Porter, climate implications manager at the First Street Foundation, a nonprofit that quantifies climate-related risks. He added that insurance companies are increasingly interested in the organization’s data.
“Insurance companies are responding to the fact that we are seeing more frequent and more severe weather events, and they are paying out more in claims than they are bringing in,” he said.
Leash Yu, managing director of personal lines at Higginbotham in Houston, said insurance companies are struggling to maintain their financial ratings and, in some cases, simply to stay in business.
“They have three options: raise their rates significantly, get rid of some risk or significantly limit the type of new business that comes in,” he said. “Some carriers are doing all three.”
Hurricanes, wildfires and extreme bonuses
The crisis first erupted in Florida, which has suffered three major hurricanes in two years. Florida policyholders now pay nearly five times the national average, according to Insurify. With many insurers leaving the state or going bankrupt, the state’s insurer of last resort, Citizens, has seen its number of policies triple in four years, to nearly 1.2 million. Citizens is now asking regulators to approve a 14% rate increase.
In California, where at least eight insurers have left the state or limited their exposure, the state’s insurer of last resort – the California FAIR Plan – has seen a 14% increase in policyholders this year alone, and a 137% increase since 2019.
In Louisiana, homeowners pay about three times the national average, according to Insurify.
A view of flooded streets after 24 hours of continuous heavy rains in Fort Myers, Florida, U.S., June 13, 2024.
Anadolu | Anadolu | Getty Images
Business concerns about competitiveness
“From a site selection perspective, these high insurance rates make it harder for companies to recruit and retain a workforce,” said John Boyd, Jr., a site selection consultant and principal of The Boyd Company in Florida. “Think about the pressures that transferees are already under with record high home prices, high mortgage rates, skyrocketing child care and health care costs. This insurance crisis is a major issue.”
For that reason, and because of the impact of higher premiums on commercial real estate, CNBC is factoring insurance into its 2024 Best States for Business study. Under this year’s methodology, the Cost of Doing Business category factors in regional increases in commercial property and casualty insurance premiums, as compiled by the Council of Insurance Agents and Brokers. The Cost of Living category looks at the cost in each state to insure a median-priced home, based on data from the National Association of Insurance Commissioners and Redfin.
Based on 2021 premiums (the most recent full year available), the most expensive state to insure a median-priced home was Colorado at $2,650 per year, followed by Florida at $2,474, Massachusetts at $2,226, Texas at $2,194 and California at $2,124. The least expensive state was Wisconsin at $702.
The risk of an interest rate hike could ease in 2025
Some experts are hopeful that the increases will soon subside. After all, they note, the insurance industry is notoriously cyclical, and insurance companies are struggling to turn things around.
“If rates go up, the risk reductions and claims mitigation efforts that they’re using now are successful, then hopefully in 2025 we’ll see a stabilization,” Yu said.
However, some states are not waiting.
In Florida, Gov. Ron DeSantis signed a tort reform bill last year to limit lawsuits by policyholders and attract insurers to the state. In California, Gov. Gavin Newsom has proposed making it easier for insurers to approve rate increases while supporting a proposal to require them to write more policies in distressed areas.
But there’s no telling when or if that will happen. In the meantime, real estate broker Bill Baldwin encourages his clients to get approved for insurance as soon as possible, just as they already get pre-approved for a mortgage.
“You have to buy this insurance much earlier than ever before,” he said. “And that’s not something we’re used to.”