Learn how extreme weather is driving up CRE insurance costs and how to protect your investments.
As the commercial real estate (CRE) market braces for rising insurance premiums, particularly in states most susceptible to extreme weather, owners must proactively seek ways to safeguard their investments. From an accounting standpoint, understanding these cost drivers and implementing strategic financial measures can significantly mitigate the financial impact.
The Escalating Threat of Extreme Weather
Over recent years, the United States has faced a barrage of extreme weather events, including atmospheric rivers, superstorms, cold waves, and wildfires. These phenomena are largely attributable to the country’s geographical diversity, rapid population growth in high-risk areas, and the escalating effects of climate change. Consequently, the U.S. leads globally in weather-related catastrophes.
Rising Premiums and Regional Variations
The insurance sector is reacting to these heightened risks by increasing premiums for commercial buildings in vulnerable areas. According to projections by the Deloitte Center for Financial Services, the average monthly insurance cost for a U.S. commercial building could surge from $2,726 in 2023 to $4,890 by 2030, marking an 8.7% compound annual growth rate (CAGR). States at the highest risk of extreme weather might see premiums nearly double, from $3,077 to $6,062 per month, reflecting a 10.2% CAGR. Conversely, lower-risk states may experience a rise from $1,935 to $3,299 per month, a 7.9% CAGR.
FEMA data indicates that commercial properties in the ten states with the highest Expected Annual Loss (EAL) due to natural hazards have experienced insurance cost increases of 31% year-over-year and 108% over the past five years. This contrasts with 25% and 96% increases, respectively, for properties outside these top-risk states. By 2030, insurance costs in high-risk states could be 24.0% above the national average, while lower-risk states might enjoy a 32.5% discount.
Underlying Causes of Increasing Insurance Costs
Over the past decade, the average insurance costs for commercial properties have almost doubled, rising from $1,558 per building per month in 2013 to $2,726 by 2023, a 5.75% CAGR. This increase is driven by the frequency and severity of extreme weather events, prompting insurers to either reduce coverage or exit certain high-risk markets altogether. Additionally, insurers are addressing accumulated losses from recent years, further influencing premium hikes.
Economic and Market Influences
The lingering effects of the COVID-19 pandemic, rising inflation, and interest rate volatility have also contributed to the reassessment of insurance pricing. Between 2021 and 2022, US property insurance premiums grew at a slower rate than inflation. However, in 2023, premium growth outpaced inflation for three of the first four quarters. While central bank measures have moderated inflation, the persistent threat of extreme weather will likely continue driving premium increases.
The Growing Frequency of Costly Weather Events
In 2023 alone, the U.S. experienced 28 separate billion-dollar weather events, with recovery costs amounting to $92.9 billion—an all-time high. These events included severe storms, floods, tropical cyclones, wildfires, winter storms, and heat waves. The frequency and cost of such events have surged by 180% over the past decade, a 10.8% CAGR. If this trend persists, the annual number of billion-dollar weather events could reach 42 by 2030.
Strategic Measures for CRE Owners
Given these projections, commercial real estate owners must adopt comprehensive risk management strategies. From an accounting perspective, the following actions are advisable:
Insurance Review and Optimization: Regularly review insurance policies to ensure adequate coverage and consider bundling insurance packages to reduce costs.
Investment in Resilience: Allocate funds for property improvements that enhance resilience against extreme weather, potentially qualifying for lower insurance premiums.
Risk Assessment and Planning: Implement detailed risk assessments and business continuity plans to prepare for and respond to weather-related disruptions.
Budget Adjustments: Adjust financial forecasts to account for higher insurance premiums and potential weather-related losses, ensuring robust cash flow management.
Engagement with Insurers: Maintain open communication with insurance providers to stay informed about policy changes and negotiate favorable terms based on risk mitigation efforts.
By proactively addressing these challenges, commercial real estate owners can better navigate the financial uncertainties posed by climate change and extreme weather, safeguarding their investments and ensuring long-term stability.
