briefcase | invest smarter | Issue #134

Don’t forget to check out Briefcase’s head writer Brad on The Very Real Estate Effect Investing podcast!

Moving on to today’s topic. We recently asked you what real estate expenses worry you the most. And insurance came out on top, even over interest rates. To which Clay the Intern responded: “Seriously? In this economy?”

We asked the internet about this. Turns out, you’re all right; we should be worried about not only the rising cost of insurance, but its availability. Let’s go!

Meet Susan Gregory, a Florida resident who had been insured through United Property and Casualty. Unfortunately, her insurance company went bankrupt, and Susan was forced to look elsewhere for home insurance. She was shocked to find out that her yearly payments would go from $8,800 to $35,000.

This reality is facing many homeowners in climate-sensitive markets like Florida and California.

Over the past few years, we’ve seen 20 natural disasters annually, with damages exceeding $1B.

To put this into perspective, this is a 6x increase from the 1980s, and insurers are feeling the heat.

Because of this, insurers getting serious about incorporating climate risks into their pricing models. As such, property premiums have jumped 12% between 2021 to 2022 alone, a trend that is expected to continue.

With housing costs rising, living in your car is now the easiest way to save and bundle your home and auto insurance. #LifeHacks.

And this rising cost trend is continuing, according to ULI. Even properties with lower risks will see rates rise 5-10% this year, with less favorable risk profiles increasing somewhere between 15-50%.

If skyrocketing premiums weren’t enough, now insurance providers are even saying to states like California and Florida…

Major providers are simply packing up and leaving certain states altogether.

Farmers is ending some policies in the Sunshine State — NYT

Allstate has quietly stopped new home insurance policies in California — SF Chronicle

Why State Farm isn't selling new California home insurance — CalMaters

AAA pulls back from offering insurance in Florida, following Farmers — CBS

So not only are property premiums increasing (dramatically in some cases), but now you’re saying we might not even be able to get coverage?

***We found a scientific rendering of the collective real estate sentiment***

In some states, Like Louisiana, providers are simply canceling insurance plans. According to CNN, 17% of homeowners insurance policyholders in that state had their policies canceled in 2022.

If you thought finding a unicorn was tough, try finding affordable homeowner's insurance. The insurance exodus casts a dark cloud over certain real estate markets, making buying or selling property trickier.

For investors, this new reality will increase expenses. If looking to sell it, it will reduce the valuation as higher insurance premiums must be underwritten when a buyer analyzes the deal.

If buyers cannot find affordable insurance, it will reduce demand for property in those markets. This will put downward pressure on housing prices. Further, the cost to climate-proof homes (ex: wildfire-proofing can cost an additional $2,800 - $27,100) will add further strain to rebuild costs, increasing premiums further.

Would-be homeowners are left with limited options; higher premiums, moving to another market, or settling for coverage with limited protection.

Florida has seen 16 severe storms or hurricanes since 2020, causing damages between $100B and $200B. It’s not surprising then to learn that Floridians pay $6,000 annually for home insurance on average (compared to the national average of $1,700). Further, the average premium in Florida has increased by 42% since 2022, and 100% since 2020.

And, in the last two years alone, 10 insurance providers in Florida have gone bankrupt. It’s easy to see why many providers pack it in and go bowling.

Is there a light at the end of this insurance tunnel? The Conversation suggests some fixes to the underlying problems.

The potential solutions include: Building stronger structures, investing in infrastructure to mitigate climate risks, and creating state-backed insurance programs.

However, it won't be an easy fix. Solving this issue requires collaboration and a genuine commitment to safeguarding homeowners against the perils of unpredictable weather.

In the short term, markets with outsized exposure to climate risks, particularly California and Florida, we feel some serious outward migration and pricing pains.

So What? Rising insurance costs and inaccessible insurance products will put downward pressure on home prices in these at-risk states. Investors and agents will need to become more familiar with insurance products, policies, and providers than ever to help alleviate the pain caused by this new insurance reality.