Homeowners and residential real estate investors in US should be prepared to face a rise in property insurance rates according to real estate financing solution provider SitusAMC.
The company in a recent white paper, ‘Weathering the Storm: Burgeoning Insurance Costs for Real Estate,’ said the impact of natural disasters on the residential property market has not been limited to California and Florida, where several high-profile disasters have taken place. In fact, in 2020, the states hardest hit by natural disasters were Texas, Virginia and South Dakota. Winter storms in Texas accounted for 40% of the total losses in the US property insurance market during the first half of 2021.
The white paper reveals that the rise in the number and severity of hurricanes, wildfires, tornadoes and other events tied to climate change has created significant risk for insurance companies, which will lead to a rise in insurance premiums and reductions in coverage for property owners.
SitusAMC vice president and head of thought leadership Jennifer Rasmussen said, "The growing number of climate events has left the insurance industry reeling. Many insurers and reinsurers have already seen their 2020 financials severely downgraded.”
Dr Rasmussen said, “As the intensity and scope of future catastrophes grow, insurance rates for property owners will likely rise significantly in the near future."
The white paper says recent demographic and migration trends are exacerbating the problem, as more people are moving to fire-prone and flood-prone areas in the west and southeast. Current migration trends will place an additional 1.2m homes at risk for flooding over the next 30 years, an increase of 10% from today according to data from First Street Foundation.
As insurance premiums rise, many homeowners who cannot afford private market options may fall back on state-backed insurers of last resort which are available at steep discounts. However, this typically offers bare-bones policies that place property owners at increased risk for losses following a disaster.
Dr Rasmussen said, "Most people may not be surprised to hear insurance rates are going up, but few understand how precarious the situation is for the insurance industry. As the number of climate-related disasters increase, many homeowners and residential real estate investors could be in for a rude awakening in the years ahead."
Many insurance companies draw from reinsurance policies to protect themselves from natural catastrophes. However, the reinsurance industry has been experiencing losses for years, and is currently passing along cost increases to insurers, which will ultimately impact property owners, the white paper stated.