As property investors follow population growth in disaster-prone areas, insurers are facing new challenges, according to a recent Wall Street Journal article.
The southern U.S. has long attracted Americans with lower living costs, warm weather, and favorable tax policies. Over the past few years, the migration trend has accelerated, with 3.9 million people moving to the region between April 2020 and July 2023, according to U.S. Census Bureau data. Many of these movers are retirees and young families flocking to states like Florida and Texas, which offer affordable housing and job opportunities.
But this migration comes with significant risks. States like Florida, Louisiana, and Texas face frequent natural disasters, particularly hurricanes, which can severely damage property and infrastructure. As property investors pour money into these regions, the insurance industry is left grappling with the escalating risk of insuring these assets. According to a Wall Street Journal report, 40% of all U.S. hurricanes hit Florida—where institutional landlords now own a significant share of rental properties.
Rising Insurance Premiums Hit Homeowners and Investors
Insurers have responded to growing climate risks by dramatically increasing premiums in these high-risk states. Bankrate data shows that between 2022 and 2024, the average homeowner’s premium for a $300,000 dwelling rose 7% nationwide. However, in states like North Carolina, Florida, and Louisiana, premiums increased three times faster than the national average.
The rise in reinsurance costs following record-breaking natural disasters has added further pressure. Reinsurers are pushing more risk onto primary insurance companies, which are passing these costs onto consumers. Homeowners and landlords in states such as Florida and California have faced such steep premium hikes that some insurers have stopped issuing new policies altogether.
Valuation Challenges for Real Estate Investors
Higher insurance premiums are also cutting into property valuations, particularly in states with frequent natural disasters. For example, multifamily property values in Florida have fallen by 6.8% since 2019 due to rising insurance costs, according to analysis from CBRE. In Houston, valuations have dropped by 11%.
As a result, some investors are questioning whether the risks in high-growth regions like Florida and Texas are worth it. One investor noted in the Wall Street Journal report that skyrocketing insurance costs on a property in Denver lowered returns significantly, making them more skeptical about investing in storm-prone areas.
Insurers Face Challenges in Oversupplied Markets
Property owners and investors in these regions are finding it difficult to pass increased insurance costs onto tenants, particularly in oversupplied markets. Cities like Orlando, Jacksonville, and Tampa have seen a boom in apartment construction, which limits the ability of landlords to raise rents. This dynamic is creating volatility in cash flows and making it more challenging for investors to underwrite deals in these areas.
For insurers, the inability of property owners to absorb rising premiums could lead to increased risk exposure and potential losses. Multifamily property insurance deals may become less attractive unless insurers find new ways to mitigate or offset these risks.
Opportunities for Insurers in Climate-Resilient Markets
While states like Florida and Texas remain popular for investors, some are beginning to look for opportunities in more climate-resilient regions, such as Buffalo, New York, or Burlington, Vermont. These areas are less prone to extreme weather, but they currently lack the strong economic growth that Sun Belt states offer.
Insurers who can identify and develop products for these climate-resilient markets may be able to capitalize on this emerging trend. Additionally, insurers might need to provide more advanced risk assessment tools, like geospatial data analysis, to help investors make informed decisions about where to invest and how to protect their properties from climate-related losses.
Insurers Must Adapt to Changing Risks
The migration to high-risk areas like Florida and Texas poses significant challenges for the insurance industry. As more people move to these regions, the demand for insurance coverage will rise, but so will the costs associated with natural disasters. Insurers will need to carefully assess these risks, adjust premiums, and explore new opportunities in more resilient markets to remain profitable.
The days of relying solely on population growth trends are over—insurers must now factor climate risks into their underwriting decisions to stay ahead in this rapidly changing environment.
(Source: Wall Street Journal, Sept. 20, 2024)