Insurance costs are now a market variable

For most of the past several decades, property insurance was a small and stable line item that investors estimated with a percentage and rarely revisited.

That has changed materially in exposed markets, and the change is structural rather than cyclical.

What has driven it

Catastrophe losses. Insured losses from hurricanes, wildfires, severe convective storms, flooding and winter events have risen substantially, both from more frequent significant events and from more property in exposed locations.

Reinsurance costs. Insurers buy their own coverage from reinsurers, and reinsurance pricing rose sharply, with higher attachment points meaning primary insurers retain more risk.

That cost passes to policyholders.

Construction cost inflation. Replacement cost, not market value, determines building coverage. Material and labor costs rose considerably, which raised insured values and therefore premiums independently of any change in risk.

Litigation environment, which in certain states has materially increased claims costs and contributed to carriers withdrawing.

What it looks like on the ground

In the most affected markets, several things happen together.

Premiums rise by large multiples over a few years.

Deductibles increase, particularly percentage deductibles for named storms and wind, which can represent a very large sum on a mid-sized property.

Coverage narrows — roof coverage moving to actual cash value rather than replacement cost, exclusions added, sub-limits imposed.

Carriers stop writing new business in a state or region, or exit entirely.

Property owners fall back to state-backed insurers of last resort, which are typically more expensive with narrower coverage.

And in some cases, coverage becomes genuinely difficult to obtain at any price for older buildings, buildings with older roofs, or buildings with claims history.

Why it affects value, not just cost

Insurance is an operating expense, so it reduces NOI directly. At a seven percent cap rate, an additional $14,000 of annual premium reduces value by $200,000.

More seriously, it affects financeability. Lenders require insurance. A property that cannot be adequately insured cannot be financed, and a property that cannot be financed has a very small buyer pool.

That is the mechanism by which insurance availability, not just cost, becomes a determinant of value in exposed markets.

What this means for underwriting

Quote it, always, during due diligence. Not a percentage, not the seller's premium, not last year's figure. An actual quote on the coverage you will carry, from a broker, with your loss history.

This is the single most important change in underwriting practice over the past few years.

Check the property's claims history, which affects both availability and pricing and which follows the property.

Model premium growth. Assuming insurance grows at general inflation is no longer defensible in exposed markets. Build in higher growth, or at least test the deal against it.

Understand the deductible structure. A five percent named storm deductible on a $3 million replacement value is a $150,000 retention. That belongs in your reserve planning, not just your premium line.

Check the roof. Roof age is now a primary underwriting factor. Many carriers will not write buildings with roofs above a certain age, or will limit coverage to actual cash value, which on an older roof is a fraction of replacement.

What can be done

Mitigation. Impact-rated roofing, roof-to-wall connections, opening protection, defensible space in wildfire areas, and elevation in flood zones. Some jurisdictions and carriers offer meaningful premium credits for verified mitigation.

This is one of the few areas where capital investment produces a direct, ongoing operating expense reduction.

Higher deductibles, deliberately, with reserves funded to match. Taking more risk in exchange for lower premium is rational if the reserves genuinely exist.

Shopping properly, with an independent broker who accesses multiple carriers including surplus lines.

Portfolio policies, where several properties are covered under one program, which can improve both pricing and availability at scale.

The market selection implication

The honest one.

Insurance cost and availability now belong alongside taxes, regulation and supply in market selection.

Two markets with identical rents and prices can produce materially different returns because of a difference in insurance that did not exist a decade ago.

And the trend in the most exposed regions has been one-directional for long enough that underwriting a reversal is not a defensible assumption.

General information about real estate markets, not investment or insurance advice. Insurance availability, pricing and coverage vary by carrier, location and property. Obtain quotes and professional advice for any specific property.