While insurance costs have risen dramatically in the past few years, some markets most affected by higher premiums — like Florida — are starting to see relief.
The commercial real estate (CRE) market faces a growing challenge: surging insurance costs. Traditionally, property insurance expenses crept up a few percentage points each year. However, recent years have seen a dramatic shift, with some markets experiencing costs exceeding 17%, according to a Moody’s report.
Across the U.S., CRE properties have seen insurance costs rise at an average annual rate of 7.6% since 2017 — significantly higher than historical norms. Properties in high-risk areas prone to floods, fires, and hurricanes have been hit particularly hard.
These rising costs can have a ripple effect. Expensive insurance can make CRE deals less attractive to lenders and investors, potentially slowing the market. Property owners struggling to secure or maintain necessary coverage face potential loan defaults.
Several factors are driving this trend.
- General inflation has pushed up costs associated with repairs and rebuilding after disasters.
- Social inflation refers to increased insurance payouts beyond what inflation can explain (litigation and certain regulations).
- Natural disasters’ increasing frequency and severity are generating more claims and higher payouts for insurers.
- Reinsurers are also facing challenges and raising their rates.
- In some areas, particularly Florida, the reliance on smaller, less diversified insurance companies can exacerbate the problem. These companies are more vulnerable to major disasters and rely heavily on reinsurance, which is becoming increasingly expensive.
Florida’s unstable property insurance market
Florida’s real estate market boasts sunshine and opportunity, but a turbulent insurance landscape threatens to dampen investor enthusiasm. Let’s examine the challenges posed by high insurance costs and limited availability, explore potential solutions, and consider the future of this crucial industry relationship.
Rising costs and limited availability
Florida’s vulnerability to hurricanes is a double-edged sword for property insurance providers. While the state’s temperate climate and natural beauty attract development, the frequent threat of storms translates to high-risk propositions for insurers.
The 2024 hurricane season just began in June, and even without any hurricanes in 2024, the state has already experienced $13.6 billion worth of weather events, including several tornado outbreaks, severe storms, and a derecho. Last year’s weather events resulted in over $18 billion in damage. Estimates are still coming in about the damage caused by over 20 inches of rain falling within two days in early June 2024. A recent report released by the Ocean Conservancy forecasts that 17 to 25 named storms may target Florida this season, with estimates that between four and seven will develop into major (category 3, 4, and 5) storms.
Catastrophic weather events leave a trail of financial losses, making insurance companies wary of offering coverage in the state. This hesitancy translates to limited availability and skyrocketing premiums, squeezing residential and commercial property owners. Many private insurance companies dropped clients last year, making the state-backed Citizens Property Insurance Corporation a popular choice.
Reinsurance reliance
To manage risk, insurance companies rely on reinsurance — essentially insurance for insurance companies. In this system, insurers (ceding companies) transfer some of the risk they assume from policyholders to other insurers (reinsurers).
Reinsurance helps insurance manage their financial exposure and protects them from financial ruin caused by a significant event (like a hurricane) or a surge in claims. It also allows them to take on more policies and cover risks too big to handle alone, helping them stay competitive.
However, Florida’s high-risk profile increases reinsurers’ reluctance to participate. The increasing frequency and intensity of storms drive up costs for Florida insurers, which translates to higher premiums for policyholders. This lack of reinsurance capacity further restricts the availability of property insurance for commercial real estate, creating a vicious cycle.
Impact on investment and development
High insurance costs have also overshadowed the state’s sunny commercial real estate market. Investors, faced with the potential of substantial losses stemming from a lack of appropriate insurance coverage, are hesitant to enter the market. Even seemingly attractive properties lose their luster if the risk of securing appropriate insurance coverage looms large.
Limited insurance availability also impacts development. New construction and renovation projects stall if developers can’t secure adequate coverage. This stagnation has hindered economic growth and potentially limits the availability of commercial space to meet market demands.
Since 2021, several private insurers have left Florida or gone bankrupt from the high number of claims, pushing more policyholders to use Citizens Property Insurance Corporation. But the average policy in Florida is significantly higher than the national average, and flood insurance adds another layer of cost.
Legislative efforts and potential solutions
The Florida legislature plans to address the persistent insurance crisis. With home insurance costs soaring over 100% in three years and premiums reaching an average of $6K annually—the highest in the nation—many residents faced a huge burden. Some condo associations saw premium hikes grow from $65K to almost $800K in four years.
The legislature is considering reforms in their session with proposals including:
- Direct subsidies for policyholders
- Expanding coverage offered by Citizens Property Insurance Corporation
- Reducing reinsurance costs
- Increased transparency from insurance companies
While experts predict continued double-digit increases in 2024, the hope is to slow the rise compared to previous years. In May 2024, the Florida Office of Insurance Regulation said eight companies have filed or will file to reduce property insurance rates this year — and another 10 indicated that they will not raise rates this year — signaling the possibility that the market is strengthening and stabilizing.
According to Moody’s Analytics Report, the state’s insurer of last resort, Citizens Property Insurance Corporation, is also improving financially. The company reported a net income in 2023, a significant turnaround from previous years’ losses. Their “Depopulation” program is also working: over 275,000 policies transitioned to private insurers in 2023, and that number is expected to rise in 2024.
The market overall is in a better place, too. The combined ratio for 2023 is near break-even, a stark contrast to past years’ billion-dollar losses. Insurers are reserving less for potential losses, indicating increased confidence in the market.
Finally, the Florida Hurricane Catastrophe Fund, which helps cover storm damage, has seen rates decrease for 2024. This drop translates to lower insurance costs for policyholders. These positive developments suggest a brighter future for the state’s property insurance market. While challenges remain — and the 2024 hurricane forecast is worrisome — recent improvements offer a sense of relief for homeowners and businesses in the state.
Are you a commercial real estate investor or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United, an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
