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Disaster-averse insurers are jacking up rates and restricting coverage, worsening the sector’s post-pandemic crisis.
It’s not just homeowners starting to feel the effects of extreme weather on their insurance bills. The commercial real estate sector, some $20 trillion worth of property from cell-phone towers to apartment complexes to office buildings to warehouses, is also seeing unexpectedly large premium increases or disappearing coverage.
The challenges of damage from wind and water, smoke and fire, snow and ice are likely to compound what’s a challenging moment for the massive industry, as work from home and migration reshape how office space is used and as high interest rates make the financing-dependent business more perilous. With higher insurance costs will likely come some combination of lower payouts for investors and higher rents for tenants.
“Rising insurance costs are a growing problem for commercial property owners, particularly in states with increasing climate-related risk, such as Florida and Texas, where costs are rising upwards of 50% and starting to threaten new development and property sales,” Yardi Matrix, the commercial real estate research firm, said in a report earlier this year.
In areas affected by large storms, not only is insurance getting more expensive, it’s getting more limited as well, according to Yardi Matrix, including “new exclusions for damages such as mold or flood endorsements.”
“Clients with coastal exposures and/or less desirable risk … have experienced more difficult renewals. They have taken what coverage they can get, where it is available, and have been ready to consider the alternatives,” the insurance broker Gallagher said in a market report.
The losses due to weather have been felt up and down the business, with insurance and reinsurance companies taking big hits. Munich Re, the large reinsurer, has seen its underwriting (i.e. the difference between premiums collected and claims paid out) “deteriorat[ing] since last year, primarily as a result of higher natural catastrophe and human-made losses in the second quarter,” according to Morningstar analysts. Insurers are then passing those losses onto customers in the form of higher premiums.
For instance, the insurer Chubb said it had $400 million in catastrophe losses in the second quarter “principally from weather-related events in the U.S.,” the company’s chief financial officer Peter Enns said in a July conference call with analysts. At the same time, the insurer is raising prices on its property and casualty clients: “In terms of the commercial P&C rate environment, rates and price increases in property and casualty lines were strong,” Chubb’s chief executive officer Evan Greenberg said on the call. Overall, pricing was up in Chubb’s North American business by 12.8 percent, Greenberg said, while property insurance pricing was up over 30 percent.
“Premiums are going up,” Cal Inman, a principal at the climate research firm ClimateCheck, told me. “It’s an issue in commercial real estate. The risk profile is changing, we’re seeing higher frequency of events and intensity.”
Higher insurance costs have been spotted all over the commercial real estate market. Equity LifeStyle, which owns and operates RV resorts, campgrounds, and manufactured home communities, said in financial filings that its insurance for its RV and campgrounds have seen its deductibles for “most catastrophic events” increase from $2 million in the aggregate to $10 million.
Most of the company’s properties in Florida experienced “flooding, wind, wind-blown debris, and falling trees and branches,” according to its annual report, while four RV sites “experienced strong winds as well as significant flooding, including from unprecedented storm surges that resulted in damage to certain common area buildings, utility infrastructure and residents’ homes.” The company incurred $40.6 million in cleanup cost in 2022 that was covered by its insurance and another $10.3 million in costs in the first half of this year.
On the other side of the country, Hudson Pacific Properties, which owns offices and studio space on the West Coast, reported an increase in insurance premiums starting in April. Last year, it had prepaid $6.5 million in insurance, up from $5.4 million in 2021. But in the first six months of this year, those costs have already ballooned to $21.7 million.
Equity Residential, which owns over 80,000 apartment units, reported in its second quarter of this year that its insurance costs had gone up by just over 14 percent from the second quarter of last year, which it attributed to “higher premiums on property insurance renewal due to challenging conditions in the insurance market.”
The higher insurance costs are not just limited to residential and office investors. Prologis, which owns over one billion feet of logistics infrastructure (think lots of warehouses), said in its most recent quarterly report that it had incurred “higher insurance costs from an unusually active storm season during the first quarter of 2023.”
“The premiums that insurers charge are changing to reflect increased risk,” Inman said. “If you put that next to everything else that happens in the industry, that’s a lot. Beyond premiums going up, you’re seeing some properties [that are] hard to get insurance on.”
That everything else is namely high interest rates. As interest rates have gone up, refinancing buildings has gotten more expensive and the commercial real estate loans that banks and other financial institutions — like insurance companies — hold on their books have declined in value. The combination of more extreme weather and a tighter financing environment presents something of a doublebind for commercial real estate — some types of buildings, like office space in New York and California, have probably gotten intrinsically less valuable, while the cost of operating and financing the business has gone up.
And like the high interest rates, there may be no good place to hide from the bad weather.
While the issues in the insurance markets in California and the Gulf Coast are well known and especially pronounced; according to Gallagher, extreme weather and corresponding large insurance losses are occurring in the central and northern parts of the country as well.
“Atmospheric rivers and severe convective storms (SCSs) during the first three months of the year drove insured losses to nearly $10 billion, resulting in one of the most costly first quarters on record,” the Gallagher report says. “Clients with exposure to Northeast wind, wildfire, and/or severe weather events across the Midwestern region may now be seen as riskier than in the past.”
Read more about climate change and insurance:
Vermont Is the Soggy Edge of America’s Flood Insurance Crisis
Matthew is a correspondent at Heatmap. Previously he was an economics reporter at Grid, where he covered macroeconomics and energy, and a business reporter at BuzzFeed News, where he covered finance. He has written for The New York Times, the Guardian, Barron's, and New York Magazine. Read More
Read MoreA new report forecasts a future where reefs go over a “tipping point.”
Coral reefs are a thing of wonder, both organism and underwater infrastructure that houses thousands of species of fish. They are also, as you might already know, in grave danger. Climate change is contributing to massive waves of coral bleaching around the world, from the Great Barrier Reef to the ocean off of Florida, where an extreme oceanic heat wave this year turned mile after mile of reef a ghostly white.
We’ve known about coral bleaching for years, but a new report out Wednesday draws fresh attention to corals’ plight, including reefs — along with ice sheets, rainforests, and ocean currents, among others — on a list of imminent climate “tipping points.” And if they go over the brink, the consequences could reach far beyond the ocean floor.
According to the report, about a billion people, or 13% of the world’s population, are estimated to live within 100 kilometers of a coral reef. Together, those reefs provide $9.9 trillion of economic value each year. Reefs are sources of both nutrition and income; in Australia, the Great Barrier Reef is estimated to create 68,000 jobs and 5.7 billion Australian dollars of revenue each year, mostly from tourism. This means the risk to coral is a risk to humans, as well.
There’s still a lot we don’t know — “There are numerous pathways by which coral reef degradation may cascade into social and economic tipping points,” the authors write — starting with how exactly coral loss affects fish. Some studies have found that species like butterfly fish and parrot fish were negatively affected when their local coral bleached; other studies have shown fish communities getting on just fine.
But those bleaching events were limited. The authors of the “Global Tipping Points” report — led by Tim Lenton at the University of Exeter’s Global Systems Institute, in collaboration with a couple hundred researchers from around the world and received funding from the Bezos Earth Fund — suggest that coral could soon suffer something catastrophic and nearly irreversible on a worldwide scale.
“Documented impacts of coral cover declines include a loss of fish species, reductions in overall fish biomass and productivity, and potential destabilization of the food web,” the authors write. “If reefs are forced by climate change into low-productivity states, and if these states in turn force fish communities across a tipping point into a less diverse and less productive state, many coastal human communities will be forced to modify their lifestyles in significant ways.”
It’s yet another example of the sort of compounding disaster that climate change tends to bring, and a reminder of the interconnectedness of the ecosystems we live in and rely on, even if we can’t always see them. As Benji Jones writes in Vox, scientists are doing their best to find ways to save coral reefs; soon, however, their jobs could turn entirely to resurrection.
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