How Climate Change Is Increasing Maintenance Costs and Straining Insurers

The effects of climate change on buildings are becoming evident, not just through the destruction caused by storms and floods, but also through gradual damage that’s challenging insurers and property owners alike.

Published on October 23, 2024

climate change

The effects of climate change on buildings are becoming evident, not just through the destruction caused by storms and floods, but also through gradual damage that’s challenging insurers and property owners alike. Wild temperature swings, prolonged heat waves, and severe droughts are all contributing to the degradation of infrastructure in ways that the insurance industry cannot ignore.

Data from Trepp, a real estate analysis firm, shows repair and maintenance costs rose by 30% last year in many major U.S. markets, including Dallas, San Francisco, and Houston. Asphalt shingles, steel railings, and even masonry walls are deteriorating faster than expected under intense and fluctuating climate conditions. These are not isolated incidents but reflect a broader trend that insurers need to consider in their risk assessments.

A Growing Cost Burden for Property Owners

Many older buildings, constructed for a different climate reality, are struggling to withstand today’s severe environmental conditions. As Congressman Josh Gottheimer emphasized in a separate announcement, the cost of keeping properties safe from climate change damage can often become prohibitively expensive. The same principle applies to maintaining the integrity of the built environment amid rising temperatures.

Buildings in the U.S. are grappling with everything from heat-induced roofing failures to foundations shifting due to severe drought. Christian Whitaker of JLL warns that outdated HVAC systems, originally designed with decades-old weather data, are now struggling to keep up, leading to frequent breakdowns and increased operational costs. Not only do these issues lead to direct financial strain on property owners, but they also add pressure on the insurance industry as claims and payouts increase.

Underinsured Risks and Increasing Uncertainty

Unlike acute climate events, such as hurricanes or floods, the gradual wear and tear resulting from extreme temperatures often aren’t covered by standard property insurance policies. According to Jose Ramirez from Savills, the stress on building materials like asphalt and concrete is rising dramatically, as roofs and walls face temperatures far beyond what they were originally designed to withstand.

Mechanical systems, such as HVAC units, are also showing signs of stress. In Minnesota, recent winters have featured wild temperature swings that caused structural materials to expand and contract unpredictably, leading to accelerated damage. Unfortunately, this gradual damage is much harder to insure and is often categorized as routine maintenance, which remains out-of-pocket for most property owners.

Climate Change Global Implications and Future Challenges for Insurers

These issues are not unique to North America. Across Europe and Asia, the impact of shifting climate patterns is putting infrastructure under stress. In China, a country with rapid industrial development, infrastructure faces severe damage from rising temperatures and sea levels, threatening residential and commercial properties alike.

In Greece, the combination of aging infrastructure and record-breaking heat waves is compounding the financial strain on property owners. Older concrete structures, which make up a significant portion of Greece’s building stock, are particularly vulnerable to temperature fluctuations and UV radiation.

Natalie Maxwell of the National Housing Law Project emphasizes that this largely unseen damage makes buildings more vulnerable when outright disasters hit, thereby increasing the overall risk for insurers. The need for forward-thinking assessments and investment in resilience is becoming ever more apparent.

Moving Forward: Solutions for the Insurance Sector

Addressing this ongoing crisis will require significant investments, both in retrofitting buildings and in adapting insurance products to the evolving climate risks. The U.S. Inflation Reduction Act and European Union’s Recovery and Resilience Facility have begun providing funds for retrofitting and upgrading buildings, which could serve as a first step toward resilience.

However, the insurance industry must also adapt. Property insurers will need to account for the growing prevalence of these chronic, climate-related impacts on buildings and infrastructure. There’s an opportunity for insurers to develop products that address these slow-motion risks — perhaps offering specialized coverage for gradual climate-related wear and tear, as part of a broader risk management strategy.

Christian Whitaker of JLL suggests that regular property assessments and greater transparency about climate resilience will be critical to reducing the long-term costs associated with extreme weather. For insurers, recognizing these risks and developing new, targeted policies could also mean capturing an emerging market while supporting the resilience of the built environment in the face of a changing climate.