Real Estate News & Commentary

Climate Change Could Mean Big Spike in Home Insurance Rates

Expertise: Mortgages & Creative Financing, Landlording & Rental Properties, Business Management, Real Estate Deal Analysis & Advice, Personal Development, Real Estate News & Commentary, Real Estate Investing Basics
8 Articles Written
firefighter standing in woods ablaze

Early this morning I woke up to a text from a real estate investor I mentor: “Is it true that my insurance could double, triple, or even get cancelled due to climate change?”

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

My answer was straightforward, “Yes.”

I went on to explain that with the advance of climate change, the insurance industry is reassessing how it can control its risk exposure while still managing its core business. That business is, of course, insuring policyholders’ property and providing a safety net in the case of damage or destruction.

But this is now a much more complex issue and evolving concern for the insurance industry both locally and globally.

What We Know About the Impact of Climate Change on Real Estate

In February 2019, the Urban Land Institute (ULI)—the premier real estate research and leadership organization, considered to be the oldest and largest network of cross-disciplinary real estate and land use experts in the world—published a research paper in partnership with Heitman Properties LLC, a global real estate investment management firm. The report is entitled "Impacts of Climate Change on Real Estate." (1)

This type of a research paper is also known as a “white paper”—a government or other authoritative report that provides information, data, or proposals on an issue. The extensively referenced report is an effective, academically worthy piece about the significant, broad, and worldwide effects climate change is having on the institutional aspects of real estate and investment.

It points out that the insurance industry is doing everything it can to cope with the changes as they are occurring. But it also supports the warnings in the United States Government’s “Fourth National Climate Assessment” (2), that extreme events are becoming more frequent, intense, and widespread.

closeup of lower half of a person riding a bicycle in heavy rain on city street

The Insurance Industry’s Perspective on Climate Change

The Insurance Journal has roots dating back to 1923. (3) It is the periodical widely considered to be the most actively-read and well-respected property and casualty news publication. It consistently presents the most current information on the state of the insurance industry in relation to climate change. The momentous losses caused by increasingly powerful and more extreme weather events is forcing the industry to vigorously re-examine long-held industry norms.

In truth, according to The National Association of Insurance Commissioners, home insurance rates are increasing and will continue to do so. From 2005 to 2015, the year with the latest available data, the rates increased more than 50 percent. They attribute this to a small host of issues, the first on the list being natural disasters. You can download the PDF report here.

Insurance Can Only Do So Much

Understandably, insurance has its limits. Insurance companies are becoming more responsive to how they manage and cope with the risks these continuously up-ticking and increasingly destructive events leave in their wake. But some of those responses limit the regional areas companies will insure, the amounts of coverage they will offer, how much money the same coverage will cost, or even whether or not a home or property is even insurable at all.

Related: There’s a 90% Chance You Have the Wrong Insurance Policy

The state insurance commissioners cannot force a company to continue to insure a specific region or risk category. And according to the guidelines in most states, as long as the insurance company can justify the economic reasons for a rise in rates, in most cases, they will receive no pushback from states for even the most significant jumps in premiums.

How to Keep Your Real Estate Investments Protected and Safe

What does this mean to you as a responsible real estate investor?

It makes it clear you must take an active role in understanding what risks could affect your real estate investments and how likely those risks will be as weather events continue to worsen. You also need to assess the potential risks, not only to your current properties but also to any new property you are considering for acquisition.

But just because a property faces elevated risks does not mean the real estate is a “no go.” It simply means that, with your newfound knowledge and thorough understanding of what could lie ahead for this property, you can now more accurately assess whether or not it is right for your portfolio.

Keep in mind, you can mitigate many risks with responsible maintenance. You can avert other risks with thoughtful planning. You are not a prisoner to an unknown future. You cannot control the effects of climate change, but you can absolutely control how you react to the foreknowledge of what to expect.

closeup of hands clasped shielding cookie cutter in shape of house

The investor who wrote me this morning has been investing in several areas of the country, each of which has a different climate and weather issues to contend with. Some have had prolonged periods of little rainfall, followed by large amounts of unanticipated rain. In periods of drought, the ground becomes dried out and hardened. When the periodic deluges do come, the land cannot absorb the water quickly enough, so flooding results. This is a huge liability for an insurance company.

Some of the other areas have experienced issues with more intense fire seasons, more intense winds, or extreme freezing events. Different regions have varying climate impacts, so you can see how insurers are facing some very real new challenges. These compounding issues complicate insurance companies’ ability to accurately analyze and effectively evaluate and manage their risk exposure.

We’re All in This Together

Just like us, insurance companies are in business to make money. They are not villains in this scenario. They are simply businesses attempting to continue making a profit in a changing global scenario that is rapidly being built upon a new normal.

There are a number of solutions for how to deal with climate change’s effect on your portfolio. Here’s a start:

  • Educate yourself.
  • Read everything you can.
  • Thoroughly understand the area(s) and location(s) you are investing in.
  • Know what risks are already occurring.
  • Don’t make assumptions. Just because you’ve previously invested in a region before, do not assume you know all the potential climate-related risks.
  • Look ahead to what risks are anticipated for the future.
  • Research how to mitigate the upcoming changes.

Once you've gone through this exercise, take this new understanding of your situation and talk to your insurance agent. Be prepared to ask some very challenging questions to be sure your agent understands the weather-related risks.

Related: Should Homeowners Insurance Cover Cyber Fraud?

If you already own the property, review how items on your cash flow analysis may already be changing (i.e., utilities, insurance costs, repairs, and replacements following weather events) and impacting your profit margins.

If you are considering purchasing a new piece of property, then add an extra layer of research and cost consideration to most aspects of your due diligence. Don’t rely exclusively on the historic data provided by the seller. Factor in the cost considerations for how the items on your cash flow analysis could change moving forward.

Most importantly, remember, you are not trapped. If you don’t like what you’re finding and you own it, you can sell. Then, go out and find something with a risk profile you feel you can live with more comfortably

But once you’ve completed your research, if you like what the facts tell you, then go with it. Trust your gut.

If you don’t like what you’re finding and you don’t own the property yet, don’t buy it. Take your newfound knowledge and skills and start looking for the next property with risks you are more comfortable managing.

In the end, you have to feel like this property is an asset, not a liability. If upon reviewing an area or a property’s risk exposure you find the property’s exposure to damage or risk exceeds your comfort level, it’s time to look elsewhere.

Sources

  1. https://americas.uli.org/general-posts/impacts-of-climate-change-on-real-estate-highlight-need-for-a-better-understanding-of-risk-assessment-practices-says-new-report-from-uli-and-heitman/
  2. https://nca2018.globalchange.gov/
  3. https://www.insurancejournal.com/

What are your thoughts on climate change and its impact on the insurance industry?

Let’s discuss in the comment section below.

B.L. Sheldon is a foremost authority and world leader in communicating the ways climate change and global weather events impact our real estate and business investing profitability. She is an activ...
Read more
    Katie Rogers from Santa Barbara, California
    Replied 10 months ago
    State Farm will not insure if your house is within 1000 feet of the highest tide. Between 1001 feet and 2000 requires special underwriting, but it is possible that insurance will be denied. 2001+ ft and normal underwriting procedures operate.
    BL Sheldon Investor from Colorado
    Replied 10 months ago
    Hi Katie, I've been doing quite a bit of research on these issues. They are occurring more and more in various areas of the country for a wide variety of reasons. Thanks for the specifics on this one.
    Nathanael Steele
    Replied 10 months ago
    How is not insuring properties close to the beach, or high tide, a change from, say 1923?
    Katie Rogers from Santa Barbara, California
    Replied 10 months ago
    I don't know, but my State Farm agent says it is a relatively new rule.
    BL Sheldon Investor from Colorado
    Replied 10 months ago
    Great question, Nathanael! Investors and homeowners have historically been easily able to get insurance along the coast without too many barriers to insurability. But with rising sea levels, stronger storm surges and an ongoing increase of coastal erosion because of those factors and others, insurance companies are finding their risk levels dramatically rising. Insurance companies do not like to lose money, so they have begun making aggressive decisions in an attempt to limit their exposure to claims and liability.
    Katie Rogers from Santa Barbara, California
    Replied 10 months ago
    My agent says the risk from tsunami has become too great. Last winter, sometimes the picnic tables and hibachis near the beach had their feet in water.
    Jerome Kaidor Investor from Hayward, California
    Replied 10 months ago
    Indeed it is already so. One of my properties just came up for renewal and the rate had doubled. Apparently the company took big hits with the recent California fires, and raised their rates for everybody. Competing quotes were in the same ballpark.
    BL Sheldon Investor from Colorado
    Replied 10 months ago
    Hi Jerome, I am so sorry. I have been dealing with issues such as these with my own properties throughout the country for various reasons. Climate change is naturally affecting insurers, and things are changing quickly in the industry. Leaving us as investors in a complex squeeze.
    Jennifer DenBleyker from Utah
    Replied 10 months ago
    That’s not due to climate change but due to the failure of California to adequately clear brush. The absolute ignorance on this subject is unreal.
    BL Sheldon Investor from Colorado
    Replied 10 months ago
    Hi Jennifer, I believe if you read the extensive interviews with firefighters throughout California and the surrounding states, including your own, you will find that they discuss the intensifying conditions created by the circumstances relevant to climate change as a well understood precursor to the fire events being seen in California, Colorado, New Mexico, the Canadian Rockies, Georgia, Texas, North Carolina, Florida, Arizona, Oklahoma and South Carolina. And just to assist you in understanding the severity of the situation, your own state of "Utah set fire records for loss of property in 2018. As of August of that year, an estimated 370 structures had been destroyed, the most destructive season for the state since 2003. Most of the destruction was caused by the Dollar Ridge fire, which burned 363 buildings, a large portion of which were residences. The state had been experiencing an extreme drought in the months before, creating the right conditions for a fast-moving and explosive fire." These are the conditions, attributed by fire fighters to climate change.
    Katie Rogers from Santa Barbara, California
    Replied 10 months ago
    Fires in California start for all sorts of reasons. https://www.voanews.com/usa/experts-blame-multiple-causes-california-fires Many have nothing to do with brush. Something like 67% of California's forests is managed by the Federal government, not the state. The forestry department clears brush on a regular basis. The fire department does annual inspections of the defensible space around rural residences. A couple years ago hot winds on a particular summer evening created air temperatures of 90 degrees even at 10:00 pm, igniting a fire IN TOWN. Fire is probably not the reason his insurance rates doubled. Insurance rates are based on risk. If the fire started in the mountains and came down into the city as the Thomas fire did, the mountain fuel is all gone. After the the available fuel has burned, the risk of fire is very low.
    BL Sheldon Investor from Colorado
    Replied 10 months ago
    Thank you, Katie, that was a valuable link. I found it extremely interesting.
    Katie Rogers from Santa Barbara, California
    Replied 10 months ago
    We have a fire very close to town starting yesterday afternoon. More than 4300 acres have burned so far. Although the blaze is not yet contained, evacuation orders have been lifted for about 4000 residents. There is supposed to be quite a bit a rain tonight. This is a mixed blessing. the rain will help with firefighting, but could also cause a debris flow.
    BL Sheldon Investor from Colorado
    Replied 10 months ago
    Hi Katie, the cycle you mention of drought, heat, fire, rain, flood has become, sadly, all to common with the changing climate. I'm wishing you safety in this newest event.
    Charlene McNamara Rental Property Investor from Nevada City, CA
    Replied 10 months ago
    Definitely happening in our area of Northern California. Almost all the insurers have pulled out entirely, most every homeowner had their insurance cancelled on them in the past year. New home buyers often have to drop out of escrow due to the inability to get insured.
    BL Sheldon Investor from Colorado
    Replied 10 months ago
    Hi Charlene, I was chatting with an appraiser over the holiday weekend and he was telling me that there are more and more climate and disaster events that are being discussed in their additional academic training classes. The effect across the real estate investing industry is generating a greater and greater recognition of the need to be aware and educated.
    Katie Rogers from Santa Barbara, California
    Replied 10 months ago
    Insurance needs to be a contingency in the purchase contract. The unwitting buyer could face the loss of their deposit.
    BL Sheldon Investor from Colorado
    Replied 10 months ago
    That is a brilliant idea, Katie! I love it!