How confident are you in your level of insurance?
Many companies within the commercial real estate (CRE) industry feel confident that when disaster strikes, their insurance provider will have their back. However, disaster has struck more than normal over the past few decades, and the CRE world is being quickly reminded that coverage is rigid, and if you aren’t insured for the issue you’ve endured, you may be out of luck.
Since 1980, the U.S. has endured 254 weather and climate disasters, with total damages for all events combined exceeding $1.7 trillion. The number of natural disasters per year has increased consistently over the past decade, hitting 16 disasters in the U.S. in 2017 and 2018. In 2019 alone, we’ve seen 10 so far.
Many insurers are considering different strategies they can take as extreme weather is resulting in huge, never-before-seen insurance payouts. Last year alone, global insured losses from natural disasters or climate events totaled $85 billion, landing fourth highest on the record for a single year high. However, according to Swiss Re Institute’s sigma report, combined insured losses for 2017 and 2018 totaled $219 billion, a record high for a two-year period.[i]
The climate-related disasters, including wildfires, hurricanes, flooding, and more only appear to be getting worse, and insurance companies are scrambling to make sure they have all their ducks in a row. The 2018 wildfires burned almost 1.9 million acres in California, and the Camp Fire alone hit almost $10 billion in damages. However, the gap between the cost of damages and the cost paid out by insurance companies can be vast in some circumstances.
For example, in 2017, the global economic loss was $337 billion, but the insured loss total was $144 billion, leaving a catastrophic protection gap of $193 billion. The largest drivers of the catastrophic loss were devastating hurricanes. Since most homeowners do not have flood-related coverage, and many property owners do not own a National Flood Insurance Program (NFIP) policy, these damages fall within the insurance pay gap.[ii]
When insurers opt out of weather-related coverage, property owners are more susceptible to high expenses and repairs from natural disasters. This risk is a huge deterrent to property investors, especially in high risk areas that see more hurricanes, fires, or earthquakes. Some of these areas are even being seen as uninsurable due to the level of risk that comes with the properties. After some of the worst wildfires in history caused mass destruction in parts of California, some insurance companies have cancelled or decided not to renew policies.
Considering that insurance is often required for a mortgage or refinance, whether the response to a disaster is to increase rates or not offer insurance at all, property owners will be faced with higher capital expenditure and operational costs, and/or a decrease in the liquidity and value of buildings.
Recovery Efforts with Insurance Deficits
With devastating damages to properties followed by inadequate insurance comes loan defaults and bankruptcies, like we saw after Hurricane Harvey. Of the 100,000 homes in Houston damages by Harvey, 80% had no flood insurance at all, leaving thousands of people struggling to make payments on their mortgages, leading to delinquencies at extremely high rates. Fortunately, thanks to a strong economy, Houston was able to avoid a serious mortgage crisis. The storm did still leave many property owners with holes in their pockets. Many property owners were left with upwards of $9,000 monthly premiums, huge bills for mold and other damages, and the potential for it to happen all over again at any given time.
Concerned About Risk and Recovery?
Whether you are in the process of a property transaction or need to understand the risks associated with a property, EBI’s due diligence team can assist in evaluating the challenges of any property type, working to create customized solutions that fit your needs and allow you to make the best business decisions.
Send us a message to start the conversation about your investment risk.