{"id":177901,"date":"2024-09-30T14:37:49","date_gmt":"2024-09-30T20:37:49","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=177901"},"modified":"2024-10-01T07:11:01","modified_gmt":"2024-10-01T13:11:01","slug":"property-insurance-is-changing-here-is-how-2025-will-look","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/property-insurance-is-changing-here-is-how-2025-will-look","title":{"rendered":"Property Insurance Is Changing\u2014Here’s What to Expect Next Year"},"content":{"rendered":"\n

Property insurance is<\/span> a <\/span>key<\/span> component in<\/span> any real estate investor\u2019s business plan.<\/span> Depending on the area of the country you\u2019re investing in, property insurance costs can add many thousands to your annual property expenses\u2014and in some areas of the country, these are rising rapidly. <\/span><\/p>\n\n\n\n

Almost everyone knows by now that California and Florida are experiencing property insurance crises, with insurance increasingly scarce <\/span>and\/or<\/span> unaffordable. <\/span>This<\/span> is<\/span>, of course,<\/span> ironic for investors because, in many other ways, these continue to be lucrative investment destinations.<\/span> <\/span><\/p>\n\n\n\n

Here, we\u2019ll look for silver linings for investors in these states. (Spoiler alert: There are a couple.) We\u2019ll also take an in-depth look at destinations <\/span>that have traditionally been<\/span> seen as \u201csafe\u201d from the insurance point of view, thanks to a more stable climate. We\u2019ll see how this is changing and point to the factors investors need to <\/span>be aware of<\/span> when doing property research.<\/span><\/p>\n\n\n\n

The Midwest Is No Longer Automatically \u2018\u2018Affordable\u2019\u2019<\/span><\/h2>\n\n\n\n

Of all U.S. regions, the Midwest has been investors\u2019 favorite for the last <\/span>couple of<\/span> years. There are many reasons for this, but they can <\/span>be effectively summarized<\/span> as the golden combination of affordability and relative stability. The reasoning goes like this: The Midwest may not be as hot of a market as the South, but it will deliver steady returns because people are keen to move there, and property prices are more stable.<\/span><\/p>\n\n\n\n

This reputation is beginning to shift<\/span>, however,<\/span> with the Midwest now experiencing increased pressures on its property insurance market.<\/span> The reason is a changing climate. The Midwest is experiencing more rain and <\/span>more<\/span> frequent and intense storms, resulting in more damage to homes.<\/span><\/p>\n\n\n\n

According to the 2023 U.S. National Climate Assessment <\/span>report<\/span><\/a>, \u2018\u2018More frequent and intense heavy precipitation events are already evident, particularly in the Northeast and Midwest.\u2019\u2019 It\u2019s not just that the Midwest is getting more rain\u2014annual precipitation has already risen by as much as 20% in some areas, according to <\/span>the EPA<\/span><\/a>. It\u2019s the fact that heavy <\/span>precipitation<\/span> now tends to arrive all at once during extreme downpours. <\/span><\/p>\n\n\n\n

The results are <\/span>obvious<\/span>: heavy flooding. Iowa, South Dakota, and Minnesota <\/span>all<\/span> experienced historic flooding levels in June 2024 following heavy rainfall.<\/span><\/p>\n\n\n\n

Extreme weather patterns are affecting the Midwest in more ways than one, however. According to a recent <\/span>study<\/span><\/a> of observational data<\/span> from 1951-2020, <\/span>Tornado Alley is shifting<\/span><\/a>. Since the middle of the last century, \u2018\u2018tornado activity has shifted away from the Great Plains and toward the Midwest and Southeast United States.\u2019\u2019 While everyone knows to expect tornado activity in Oklahoma, Nebraska, and South Dakota, it increasingly includes places like Ohio, which recorded 71 tornadoes in 2024 <\/span>so far<\/span>. <\/span><\/p>\n\n\n\n

Additionally, the Midwest is already prone to seasonal thunderstorms, <\/span>with<\/span> lightning and hailstorms.<\/span> These, too, are increasing in intensity, which means that the <\/span>hail is <\/span>larger<\/span><\/a> and causes more damage to infrastructure and property.  <\/span><\/p>\n\n\n\n

The impact on property insurance premiums is severe. According to the <\/span>Federal Reserve Bank of Minneapolis<\/span><\/a>, premiums increased by 34% over <\/span>just<\/span> seven years. Some states recorded even faster hikes, notably 41% in South Dakota, <\/span>which is<\/span> significantly more than the national average of 34% over the same <\/span>time span<\/span>.  <\/span><\/p>\n\n\n\n

When insurers aren\u2019t raising premiums, they are reducing coverage. According to the report, increasingly financially stressed insurers \u2018\u2018impose new conditions on coverage of common perils, such as wind and hail damage.\u2019\u2019<\/span><\/p>\n\n\n\n

That\u2019 of course, is because wind and hail \u2018\u2018are second only to hurricanes in the damage they inflict,\u2019\u2019 which means they\u2019re among the most expensive weather events for insurers. According to the National Centers for Environmental Information (NCEI), straight-line wind and tornadoes caused $246 billion in <\/span>damage to<\/span> U.S. properties from <\/span>2014 to 2023<\/span><\/a>. Tropical cyclones, such as hurricanes, caused $695 billion in damage. <\/span>While there\u2019s a <\/span>very<\/span> significant gap between the costs of tropical <\/span>versus<\/span> nontropical weather events, the amounts are still <\/span>huge<\/span>.<\/span> <\/span><\/p>\n\n\n\n

What do Midwest investors need to be aware of?<\/span><\/h3>\n\n\n\n

Hail, in particular, is now being treated differently by insurers in hail-prone areas of the Upper Midwest (e.g., Minnesota). <\/span>While hail used to <\/span>be covered<\/span> in the same way as other types of natural disasters, i.e., with a standard deductible, the deductible is increasingly tied to the <\/span>current value of the home<\/span> and is around 2%.<\/span> That can have <\/span>huge<\/span> implications for how much an investment property is <\/span>actually<\/span> going to cost you. <\/span><\/p>\n\n\n\n

Moreover, many insurers <\/span>are refusing<\/span> to provide full coverage for older roofs and are subtracting depreciation from the amount covered. <\/span><\/p>\n\n\n\n

The other big thing <\/span>that\u2019s<\/span> happening (not just in the Midwest) is that insurers increasingly rely on newly available data about extreme weather patterns and increase their insurance premiums accordingly. In the world of climate data, hyperlocalism is now the thing, which means that two houses on the same street may have different risk profiles for the same type of weather event.<\/span><\/p>\n\n\n\n

If you get substantially different quotes on two properties <\/span>that are<\/span> nearby\/in the same town, it\u2019s worth digging into why. Chances are high that there will be a weather-related reason.<\/span><\/p>\n\n\n\n

The California Property Insurance Crisis Deepens<\/span><\/h2>\n\n\n\n

The situation is much more dire in California, where insurers\u2019 responses to the intensifying wildfires are increasingly extreme: They are canceling policies, refusing to issue new ones, or even exiting the state altogether. At this point, we are talking about <\/span>an exodus<\/span>, with these insurance companies (all subsidiaries of Kemper Corp.) announcing earlier in 2024 that they would not be renewing their California policies: <\/span><\/p>\n\n\n\n