When Insurance Becomes a Must-Have for Everyday Life

🌀 Hurricane Milton, a Category 3 storm, slammed south of Tampa, affecting a region with 3.3 million residents. Rising ocean temperatures are fueling more intense storms. Earlier this year, experts forecasted the most active hurricane season ever. While the Federal Emergency Management Agency (FEMA), in charge of hurricane relief, reports a funding shortfall, officials claim there are enough resources for ‘life-saving’ efforts. However, financing the broader recovery poses a different challenge.

🚩 Meanwhile, the NYT reports that rising debt payments in the U.S. have been chipping away at commercial real estate for over two years. But even as those threats lessen, owners of shopping malls, apartment buildings, and office towers are now facing a persistent issue: ❗rising insurance costs ❗This is something that homeowners across the country are all too familiar with. The increase in natural disasters has pushed insurance companies to significantly raise rates or leave the market altogether. Rates have climbed the most in coastal cities and towns vulnerable to severe storms and flooding, but insurers and banks recognize that no region is truly safe from increasingly extreme and unpredictable weather events.

✏️ Building owners find themselves stuck between insurers and lenders, both of whom are cautious about covering catastrophic damage and won’t permit any changes to policies, even minor adjustments that could offer struggling borrowers some relief.

✏️ While it’s difficult to pinpoint exactly how many properties have faced foreclosure solely due to soaring insurance costs, industry insiders acknowledge that some deals have collapsed over this issue. Developers and investors say that in a sector already grappling with rising interest rates, material costs, and labor expenses, insurance costs can be the tipping point.

✏️ Marsh McLennan reports that commercial property insurance premiums rose by an average of 11% across the U.S. last year, with increases as high as 50% in hurricane-prone regions like the Gulf Coast and California. This year, premiums could potentially double. Lenders have been hesitant to ease insurance requirements, fearing the ripple effects on the broader real estate market. If a major disaster wipes out a building, what happens if there’s no way to rebuild it?

As a matter of fact 🎯

☝ I get that the insurance industry is in it for profit — and a lot of it. When risks increase, they respond like any business would: by cutting costs. This means either they don’t renew policies or they drastically hike premiums. In extreme cases, they just leave the market altogether. When too many insurers pull out, the state steps in as the insurer of last resort, as seen in California, Florida, and other states. This ultimately puts the financial burden of hurricane damage to homes and businesses on state taxpayers.

☝ Another option is to ban construction in high-risk areas. However, in the U.S., this is often viewed as a “bad idea” because it gives the impression that the state isn’t a good place to live — something no politician wants. (I’m curious how these states will explain the budget cuts they’ll need to make after a major disaster hits.)

☝ Insurance is like the “canary in the coal mine” for climate change. You might ignore climate change itself, but you can’t ignore rising insurance premiums (even if the shift seems slow due to inertia). The bottom line is that insurance rates are spiking because of climate change, and this is just the start. It’s a global issue, and premiums will continue climbing. Future homes and buildings will be required to “protect” themselves from natural disasters, while insurance for older properties will only get more expensive. What’s the plan when the cost of climate disasters is 10 times — or even 100 times — what it is today?