That\u2019s especially true in regions that have suffered massive damage and hundreds of billions of dollars in claims losses from hurricanes<\/a>, wildfires, flooding and other extreme weather events over the past few years. In some cases, the losses have driven insurance companies out of business and carriers have exited<\/a> riskier markets. As a result, insurance costs have skyrocketed amid \u201chard market\u201d conditions\u2013insurance demand that greatly outstrips supply.<\/p>\n Early this year, for example, insurance brokerage HUB International and insurance company Swiss Re launched a comprehensive coverage program for shopping centers. The initiative aimed at filling a hole in the market as a result of carriers pulling back from retail assets due to high vacancies, dark anchor tenants, losses suffered during the George Floyd riots and organized looting in some cities, explained James \u201cChip\u201d Stuart, leader of HUB’s real estate specialty practice in Los Angeles.<\/p>\n But the program dissipated after Swiss Re reorganized and eliminated some business lines following a plummet in net profits in 2022. HUB plans to relaunch the program with Archer Insurance.<\/p>\n \u201cIt\u2019s hard for people to understand, but there are not that many insurance companies eager to write new business, especially in the property arena,\u201d Stuart remarked. \u201cThe competition is way down right now, and we\u2019re seeing a lot less insurance for a lot higher prices.\u201d<\/p>\n Image by wildpixel\/iStockphoto.com<\/em><\/p><\/div>\n The situation is creating potentially adverse consequences for property owners, who face default if they fail to meet insurance requirements demanded by lenders. Plus, higher insurance costs could eat into their net operating income, and passing them onto tenants may yield similar hardships for those businesses.<\/p>\n Despite the turmoil, investors are not yet avoiding areas exposed to higher weather risks, as developers of research, data and manufacturing facilities remain active in all regions observed Barry LePatner, a real estate construction adviser in New York. Still, scrutiny is increasing.<\/p>\n \u201cLenders are the ones who do due diligence on risk, and they are paying much more attention to developers who are building in areas affected by climate change,\u201d he declared. \u201cBut as long developers can make a deal pencil out, they will build in those areas.\u201d<\/p>\n If the frequency and severity of weather events witnessed over the last few years continues, however, cost pressures could become too much to overcome, suggested Cindy Barreda, a senior managing director with Trimont REA, an asset manager of complex credit circumstances for real estate lenders and investors globally.<\/p>\n \u201cWhile investors may consider how much capital they\u2019re willing to place in any particular region, we haven\u2019t seen anyone pull out of a deal because it\u2019s a difficult insurance zone,\u201d she added. \u201cBut it doesn\u2019t mean it won\u2019t happen.\u201d<\/p>\n Tracking climate and weather catastrophes that cause at least $1 billion in damage, the National Oceanic and Atmospheric Administration reported that 18 separate events in the U.S. in 2022<\/a> cost an inflation-adjusted $165 billion, the third highest amount since 1980. The first seven months of 2023 already eclipsed the 2022 pace, with 15 separate $1 billion disasters, and the Maui wildfires in August will add one more. The average number of $1 billion catastrophes since 1980 is 8.1 a year<\/a>, according to the agency.<\/p>\n \u201cIt seems like the volatility of weather events is worse than it ever has been,\u201d said Danielle Lombardo, chair of the global real estate practice for Lockton Cos.<\/strong> in New York, who participated in a recent insurance webinar hosted by Berkadia<\/strong>. \u201cLenders, real estate owners and insurance carriers are trying to get a handle on what the new normal looks like so that they can continue to transact with budget certainty.\u201d<\/p>\n To adjust to the new normal, insurance companies and reinsurers\u2013insurance for insurance companies\u2013have dramatically raised their rates. Traditionally, the cost of property insurance rose by 2 to 3 percentage points a year, but since 2017, the rates have increased an average of 7.6 annually, and they spiked an average of 17 percent midway through 2023 compared to a year earlier, according to Moody\u2019s Analytics CRE<\/a>.<\/p>\n Source: Moody\u2019s Analytics CRE<\/p><\/div>\n What insurance carriers have to pay reinsurers is driving those price increases. Reinsurance companies have increased rates 35 percent this year, according to the recently updated Buy Carpenter U.S. Property Rate on Line Index. That represents the largest increase in prices in 17 years.<\/p>\n Some of the increasing expense is impacting how insurance companies view replacement costs, as construction materials and labor have become more expensive. Typically, insurance companies would base a premium on the value of a property\u2014call it $100 a square foot\u2014but replacement cost would be $300 per square foot. Now, carriers are charging much higher premiums that reflect the replacement cost, noted Stuart.<\/p>\n \u201cIt\u2019s an advantage to both the insured and the insurance companies to get the replacement cost right,\u201d he stated. \u201cBut the hesitation that the insured have is, \u2018What\u2019s that going to do to my premium? Triple it?\u2019 And yes, it does go up quite a bit.\u201d<\/p>\n What\u2019s more, insurance companies are pegging deductibles to replacement cost, observed Fred Meno, president & CEO of asset services for Woodmont Properties<\/strong>, a Fort Worth, Texas-based retail developer, brokerage, leasing and management firm. In Texas, a hail deductible of, say, $25,000 per claim in past policies now could be 3 percent of replacement cost value. So, for a 300,000 square foot building worth $300 per square foot, that deductible is now $2.7 million.<\/p>\n \u201cThat\u2019s a huge swing,\u201d Meno said. \u201cLandlords may have an option to buy that deductible down, but it\u2019s still incredibly expensive.\u201d<\/p>\n The hard market also puts borrowers at risk of running afoul of loan requirements that typically include carrier rating and coverage minimums. When it\u2019s time to renew a policy, property owners may find lower-rated companies as the only option, or they may not be able to afford the coverage. <\/p>\n \u201cThis could be a big tripwire,\u201d Meno pointed out. \u201cProperty owners need to get out in front and begin negotiating with their lenders and educating loan officers about what\u2019s going on rather than waiting until they get a proposal and realize they\u2019re going to be in default.\u201d<\/p>\n![\"Image](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2023\/09\/iStock-847473356-Image-by-wildpixel.jpg\"){kind=tracking}
<\/a>Danger Rising<\/h2>\n
Storm Surge<\/h2>\n
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<\/a>Seeking Solutions<\/h2>\n