“It’s The Toughest Property Insurance Market We’ve Ever Seen” – What’s Forcing Carriers To Exit In Large Numbers?

This article was brought to you by Steadily. Read our Editorial Guidelines for more information.

Your offer was just accepted on a beautiful property in central Florida just a few miles from the coast. The income you earn from this short-term rental will meet your early retirement plans. Everything has been humming along relatively smoothly – until you withdraw your bid for insurance. Now, you feel like you just got punched in the gut.

The cost of insurance will certainly take a bite out of your profits, but after talking to an agent, consider yourself lucky because if you were located a few miles to the south, you would have a lot to cover. You can’t even find a carrier.

What’s happening in Florida? What about California and Texas? If it seems like it’s getting harder and harder to find affordable insurance in some areas, you’re right.

Capacity is limited, and prices are rising. Many carriers are pulling out of markets entirely. But why?

What is happening in the insurance market?

Let’s break it down with some basic insurance. Insurance companies also have to make profit. It is a balancing act of charging the right premium for the right risk so that, overall, the insurance company is able to collect enough premiums to pay all the claims they serve and their operating expenses. be able to do and still have something left over to profit from. , Like you, as a real estate investor, when you calculate your ROI after all your expenses are asking yourself, “is it worth it”? If an insurance company has to pay more in claims than they pay in premiums year after year, why bother? When that happens, you see carriers exiting the market entirely.

Overall, it is relatively simple to project the statistical probability of claims for specific things like house fires, water damage, theft, etc. But in recent years, there has been a proliferation of horrific incidents. Who could have planned a 463,000-acre fire in northern California to destroy 14,000 structures in one fell swoop? Who could have predicted that Hurricane Harvey would flood 300,000 structures in Houston with 50 inches of rain, causing $120 billion in damage? It seems like one thing after another these days, and insurance companies can’t handle the catastrophic losses.

On top of the actual catastrophic events, there is the added cost of unscrupulous contractors and lawyers who take advantage of policyholders and insurance companies to come years after an event and persuade an unwitting insured to sign over their benefits so that they try to squeeze. For more money than they should have paid the insurance companies. For the record, the owner receives only a fraction of these funds. The majority goes to contractors and lawyers. When this happens on a large scale, everyone (including the owner) bears the cost of these things in the form of increased premiums and reduced access to insurance for years to come.

You may not realize it, but insurance companies also have to buy insurance. This is called reinsurance. Over the past few years, the reinsurance market has been decimated. Industry experts say that they have never seen the condition of the property market as it is today. Reinsurance companies are losing money due to heavy property losses around the world, which leads them to increase the cost of reinsurance or, worse, to pull capacity altogether. If an insurance company’s premiums go up, everything below it should go up too. If they can’t get reinsurance at all, then

That’s when insurance companies start announcing they’re exiting the market – they’re left with no choice.

What are the reasons for insurance companies leaving the market?

Why isn’t it as simple as the insurance company raising everyone’s premiums? Why can’t we all pay a little more to get through the hardest part some of the time? Well, to some extent, that’s what we’re going to do, but in many cases, an insurance company can’t adjust their rates to take into account the high cost of doing their own business, even if they wanted to. This is because the approved insurance companies are regulated by the state governments. They must also file the smallest rate change with the state’s Department of Insurance (DOI) and wait for approval. State DOIs are often backlogged, so it can take months (even a year or more in some states) for a filing to be reviewed, let alone approved. All the while, the insurance company is stuck with pricing that is no longer profitable. By the time a rate change is approved, it is either too late, or the new rates are already out of date and another one is needed.

Let’s talk a little about the trouble areas of insurance so you can be prepared when you want to make your next purchase. Property.

corruption and greed

The entire state of Florida is a tough place when it comes to insurance. 14 insurance companies are currently in liquidation, and most of them were liquidated in the past year. Florida Citizens, which is considered a market of last resort, is currently the largest insurer of property in the state. You may not realize it, but they can fix a portion of each property owner if the citizens are unable to pay their claims. Not just property owners with citizens – every property owner in the state. The insurance crisis is also not governed by hurricane claims. This is mainly driven by fraud and hoarding even during years without hurricanes. If you must buy property in Florida, your best bet is to focus on properties that are inland and in good condition. Anything endangered, coastal, or in South Florida would be problematic to insure.

Forest fire

Wildfires are a main concern in large parts of California, Colorado, Oregon and Washington. That big beautiful cabin in the mountains may have an awesome view, but a wooden structure surrounded by trees miles from the nearest fire station is an insurance underwriter’s worst nightmare. Those premiums are going to be very high to balance out the risk.

storm

If you’re buying a property in Tornado Alley, you can expect very high premiums and special high deductibles on the wind. Oklahoma, Missouri, Nebraska, Iowa, and Texas, I’m looking at you.

Wasn’t that what insurance was for? Sure. But imagine that you and your neighbors decide to pool your money together to mutually self-insure all of your homes on the block. If one or two houses burn down you’ll have plenty, but if a tornado takes out an entire street, you’ve got a problem. The idea of ​​buying all your properties in the same neighborhood may sound more convenient for property maintenance, but an insurance underwriter won’t be too enthusiastic about it because it’s pooling risk.

storm

As you’d expect, any area to the southeast within several miles of the coast will be problematic when it comes to hurricanes. Think Louisiana, Alabama, Georgia and the Carolinas.

Texas is a challenge because it is exposed to everything. In the south, it is exposed to storms and floods. In the north, it is exposed to tornadoes. In the west, it is exposed to wildfire. And just for fun, let’s get into a freak snowstorm in the middle of nowhere. Prices are rising, and carriers are pulling out.

If you have the flexibility about acquiring properties, you can consider locations that are not hot spots for insurance right now, but incidentally, they are all great vacation spots, so it makes sense that investors Why do you come to these areas? If you sell in that area, consider the increased cost of insurance as a cost of doing business and factor that into your ROI.

final thoughts

It’s totally doom and gloom. Is there light at the end of the tunnel? we hope so! Today we are in one of the toughest markets the insurance industry has ever seen, but history tells us that eventually the pendulum will swing back, and the markets will soften.

Until that happens it’s going to be tough for a while. If you’re in one of these tough geographic areas and have an insurance company willing to offer you a renewal, you might want to consider settling for the ride, even if your premiums are going up. As a consumer, play a fair game when you have a claim, work with the adjuster to get paid what’s fair, and avoid engaging with bad actors who want to profit from your insurance policy for themselves. Want to Keeping your rental properties in good condition will help mitigate everyday hazards, even if you can’t control natural disasters that may occur. It could be the difference between you being able to get insurance or not.

As we have consistently built our brand on being the solution for real estate investors across the country, we are well aware of the challenges faced by each geographic region. We’ve diversified our partner markets so that we don’t have all our eggs in one basket when carriers have to back out due to capacity constraints. We are also committed to placing the right risks with the right carriers so that the customer gets a policy that is sustainable and the insurance company is willing to stay in business for a long time. We all have to work together in the great insurance circle of life.

Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.