How real estate trends affect insurance rates

After a turbulent 2022, interest rates are expected to remain high and likely increase this year. Add to that rising construction costs, and you have a recipe for market challenges in real estate. This will reduce profits and create more property claims.
These are the top three real estate trends that will continue to affect the insurance industry into 2023. We also discuss how real estate brokers can reduce their real estate-related risks.
High rebuilding costs and outdated property values
Expect a decrease in real estate profits as a result of years of high rebuilding expenses and inaccurate property valuations. Interest rates have increased lending and financing costs, and there has been an increase in crime in many cities.
Commercial real estate profits will also be affected by work-from-home trends, with a national unemployment rate of 18.4%. Also, pension funds have cut back on building investments. Insurance carriers will reduce their capacity and increase their insurance rates to make up the difference, further reducing profit margins.
What can we do?
Ask for higher deductibles or loss limits to reduce the impact on your property coverage. This will allow you to lower your risk profile and budget. Self-insurance may be necessary in some cases to maintain budgets for property insurance premiums in 2023. Self-insurance can be done on a primary or an excess basis.
To avoid potential damage or liability claims, you should also improve your risk management. Consider installing leak detection systems and using fire retardant materials when building or improving your property. This can help to prevent claims.
Your broker can help you to properly size your property policy. Due to the increase in replacement costs and the change in the valuation of many properties, your policy payout may not cover a rebuild because of this.
Multi-family and habitational property gains
Due to supply chain issues, higher construction costs, and a closer analysis of insurance-to value from carriers, insurance for commercial, multi-family, and habitational properties could also rise by 20% to 50%. Real estate owners who own older properties or buildings in high crime areas will be at risk from claims litigation and the increase in nuclear verdicts.
What can we do?
In certain cities, coverage will likely be less than the minimum required to protect owners in case of a lawsuit. Carriers will therefore focus on best-in class properties and require current building valuations before analyzing risk. Carriers will offer more coverage for property if they can prevent damage and liability claims.
Keep records of maintenance and renovations to get better rates on insurance policies.
Also, make sure to review your leases to determine if tenants are responsible for any risks. It is important to place safety first by implementing risk management procedures, including water mitigation equipment, and providing additional training.
The impact of CAT claims upon 2023 rates
Real estate insurance rates will be affected by extreme weather like hurricanes, floods and tornados, blizzards and droughts. In low-hazard areas, coverage for catastrophic events could increase by 20% to 50%; rates for high-hazard areas could triple.
What can we do?
The right strategies and investments can help to reduce the risk of catastrophic events. Risks can be reduced by having a well-maintained property and using materials that can withstand geographic hazards. Parametric insurance will pay a fixed amount even if your property is damaged. Additional policies like parametric insurance may be an option. These policies are often available in areas with limited property insurance capacity.
If properties are rebuilt using materials that can withstand extreme weather events and if the construction techniques adhere to local codes mandated by authorities, underwriters are more likely than not to cover them.
James “Chip” Stuart is the corporate Chief of Sales and Practice Leader for Hub International’s North American real estate specialization.