Limited capacity, undervalued properties roil coastal insurance markets
Even coastal properties with appealing risk profiles still face rate increase increases between 15%-50%.
Coastal areas across the U.S. have experienced recent changes in weather patterns. According to the National Oceanic and Atmospheric Administration, in 2022, 18 separate weather and climate disasters cost at least $1 billion in damages in the U.S. Most were hurricanes, storms and floods.
The United States Geological Survey predicts that over the next hundred years in California, about half a million people and $100 billion worth of coastal property will be at risk. Florida recently suffered between $50 billion and $65 billion in damages from Hurricane Ian — the second-largest insured loss on record. These weather incidents result in a lack of carrier capacity enhanced by rising rates and a trend of properties being valued incorrectly.
Increased insurance coverage rates
As severe weather affects the U.S. coasts, insurance carriers’ room for adequate catastrophe risk capacity is diminishing. With carriers rolling back their capacity, commercial property owners along the coast must contend with rate, valuation and deductible increases.
In its Global Insurance Market Update, Marsh reported that the 2022 fourth quarter experienced increased property rates for the 21st consecutive year. The increase caused carriers to look for ways to mitigate costs. This resulted in a challenging environment for catastrophe-exposed properties. Properties with appealing profiles still face increases between 15% and 50%.
Undervalued coastal properties
Properties not only don’t have adequate coverage, but they’re also discovering coverage gaps in their current appraisals. A study by Kroll found that 68% of buildings valued from 2020-2021 were underinsured by 25% or more. And nearly 90% of appraised buildings were undervalued. Some properties in coastal states don’t have any coverage. The Insurance Information Institute reports that only 18% of Florida’s residents have flood insurance for their homes.
The lack of protection and misevaluations leave property owners confronting unexpected losses with premiums that are ill-equipped to deal with them. Increased rates and a lack of capacity complicates finding insurance coverage and protection for property owners in coastal states across the U.S.
Risk professionals and senior leaders must anticipate and proactively manage risks to thrive amid uncertainty in a dynamic industry. As underwriters scrutinize a business’s risk capacity, buyers will be challenged to differentiate their risk during the renewal process. They may need to rethink the elements of their insurance contracts. This requires an approach rooted in data and analytics.
Stephen McCord has over 15 years of experience in real estate risk advisory services, currently serving as a regional sales leader and senior vice president of real estate & hospitality at Marsh McLennan Agency. He is based in Dallas, TX.
Opinions expressed here are the author’s own.
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