Insurance: The investor’s compass

Real Estate Investment

A Panic Call

A while back I received a panicked text from an investor I’ve known for a long while. He had read my recent book, Fearless Real Estate Investing in the Era of Climate Change. His question was straight out and had a bunch of exclamation points in tow, “Is it true that my insurance could double, triple, or even get cancelled due to climate change?!!!!!”

My answer was unhesitating, “Yes. Call me later. Let’s talk.”

Once we had a chance to hook up later that afternoon I explained that with the advancing climate change, every sector of the insurance industry is being forced to reassess its risk exposure while still offering up the services that are the heart of the industry; insuring a policyholder’s property to provide a safety net in the case of damage or destruction to the policyholder’s real estate.

Naturally, this issue is evolving daily and becoming an increasingly complex concern for the insurance industry both in the United States and globally.

Trying to Stay Ahead of the Shifts

Getting up to date on what both industries – real estate and insurance –  already understand about climate change is imperative. The Urban Land Institute (ULI) is the oldest and largest network of cross-disciplinary real estate and land use experts in the world.  In a significant report released February 2019, ULI published a research paper in partnership with Heitman Properties LLC, a global real estate investment management firm. The report is entitled “Impacts of Climate Change on Real Estate.”

This form of informational/research paper is also referred to as a “white paper”. White papers are essentially government, NGO, expert driven or other authoritative reports that provide information, data, research findings, critical analysis or proposals on an issue. This extensively referenced, thoroughly vetted report is an informative, academically worthy piece.  It addresses the broad, significant and global effects climate change is having on the wide-ranging institutional aspects of real estate investment and the industries that support real estate.

While the report makes it abundantly clear that the insurance industry is doing everything it can to stay fleet-of-foot and cope with the changes as they are occurring, it also reiterates and supports the warnings in the United States Government’s “Fourth National Climate Assessment;” extreme events are becoming more intense, increasingly frequent and vastly widespread.

The Insurance Industry’s Eye on Climate Change

A review of material available in The Insurance Journal, whose roots date back to 1923, is eye-opening. The Insurance Journal is the periodical widely considered to be the most actively read and highly respected property and casualty news publication. It consistently presents current information on and analyses of the state of the insurance industry in relation to climate change.

The growing expansion of wide-spread and financially epic losses, which are being driven by increasingly powerful and extreme weather events are forcing the industry to vigorously re-examine long-held industry formulas and assumptions.

Recently, according to The National Association of Insurance Commissioners, home insurance rates have increased and will continue to do so. From 2005 to 2015, the year with the most recent available data, rates increased by more than 50 percent. The Insurance Commissioners attribute this to a small collection of concerns, first on the list being natural disasters.

Insurance Has Its Limitations

Understandably, insurance has its risk-driven boundaries. It has limits. Insurance companies are becoming more aggressive in how they cope and manage the damage and losses these constantly up-ticking and increasingly destructive events leave in their wake.

Many of the required shifts in coverage and risk assessment limit what the regional area companies will insure, the amounts of coverage they will offer, how much money the same coverage will cost, or even whether or not a home or property is will even continue to be insurable at all.

There is No Higher Power Than an Insurance Company

Most investors – and, indeed, most homeowners – don’t understand that state insurance commissioners cannot force a company to continue to insure any specific region or to continue to provide coverage for every risk category.

According to the guidelines in the majority of states, if the insurance company can justify the economic reasons for a rise in rates, in almost all cases, they will receive no push back from states, even for the most significant jumps in premiums.

How Do You Keep Your Real Estate Investments Safe and Protected?

How can you cope with these shifting realities as a responsible real estate investor?

First:  Immediately begin taking on a very active role in understanding what risks can affect your real estate investments.

Second: Assess the potential fiscal impact of these risks, not only to your current properties but also to any new property you are considering for acquisition.

Third: Determine how likely those risks are to increase as weather events continue to worsen in the area where you invest.

Fourth: Stay mindful that just because a property faces elevated risks, that does not mean the real estate is a “no go.” It simply means that, with your newfound knowledge and thorough understanding of what could lie ahead for this property, you can now more accurately assess whether or not it is right for your portfolio.

What Can You Do?

Be creative, remember you can mitigate all kinds of risks with responsible maintenance or avert other risks with thoughtful planning. Research the creative solutions others in your area have found for the risks you face. Network with other investors and talk about the issues you recognize.

Know that you are not a prisoner to an unknown future.

While you realize, as we all do, that you cannot control the effects of climate change, you can still absolutely control how you react to the expected risks.

The panicked investor who wrote me has been investing in several areas of the country. Each of those areas has a different climate and has, therefore, begun to see different weather issues cropping up. Some have begun experiencing prolonged periods of small amounts of rainfall, followed by unanticipated excessively heavy rain. This pattern causes flooding and can produce months of pooled water that does not dissipate.

Others have been coping with periods of drought. The ground becomes dried out and hardened. Then once the periodic rains and monsoons do come, the land cannot absorb the water quickly enough, so, again, flooding results. This is a huge liability for an insurance company.

Some of the other areas have experienced issues with more intense fire seasons, more intense winds, or extreme freezing events. Different regions have varying climate conditions, which in turn create dramatically different end results.

While each area may experience vastly different weather events and, therefore, different risk factors, none of these scenarios exists in a vacuum.  The heat events in one area may cause transportation disruptions that impact logistics worldwide.  The flooding or fire events in other areas may disrupt food production.

This all gives you a big-picture look into the confounding issues that insurers are facing. These challenging and compounding issues complicate every insurance companies’ ability to accurately analyze and evaluate their risk exposure.

We’re All in This Together

Insurance companies are in business to make money, just like us. They are not villains in this scenario. They are simply businesses attempting to continue making a profit in a changing global scenario rapidly being upended by a new normal.

There are a number of solutions for how to deal with climate change’s effect on your portfolio. Here’s a start:

  • Read everything you can and gain a thorough understanding of climate change, weather events, insurance company reactions and government response in the area you invest.
  • Educate yourself about the weather disruptions and fiscal risks that are already occurring in the area you invest.
  • Don’t make assumptions. Just because you’ve previously invested in a region before, do not assume you know all the potential climate-related risks. Climate events are changing at a rapid pace and you need to stay alert to the changes.
  • Look ahead to what risks are anticipated for the future. Will the current trends continue? Can you find information that clarifies what to expect in your region?
  • Research how to mitigate the upcoming changes. Talk to other investors, insurance agents, large commercial companies about the trends they see and what they are doing about them.

Once you’ve gone through this exercise, share the knowledge you gain and your new understanding and reasoned analysis of your situation with your insurance agent. Be prepared to ask some very challenging questions, you want to be sure your agent understands the full measure of the weather-related risks.

If you already own property, review how items on your cash flow analysis spreadsheet is changing (i.e., utilities, insurance costs, repairs, and replacements following weather events) and how it impacts your profit margins.

If you are considering purchasing a new piece of property, then add an extra layer of research and cost consideration to most aspects of your due diligence. Don’t rely exclusively on the historic data provided by the seller. Factor in these new cost considerations you have recognized and put numbers to how the items on your cash flow analysis could change moving forward.

Most importantly, remember, you are not trapped. If you don’t like what you’re discovering about a property location in which you are invested, you can sell. Then, go out and find something with a more comfortable risk profile, one that won’t keep you up at night.

Once you’ve completed your research, if you like what the facts tell you, then go with it. Trust your gut.

If you don’t like what you’re finding and you don’t own the property yet, don’t buy it. Take your newfound knowledge and skills and start looking for the next property with risks you are more comfortable managing and living with day-to-day in your portfolio.

In the end, you have to feel like this property is an asset, not a liability. If, after reviewing an area or a property’s risk exposure, you find the property’s exposure to damage or risk exceeds your comfort level, it’s time to look elsewhere.

B.L. Sheldon

B. L. Sheldon is an author, speaker, social entrepreneur, researcher, active real estate investor and a psychotherapist. In her groundbreaking book, Fearless: Real Estate Investing In The Era Of Climate Change, she tackles the intersection of real estate and climate change. In a calm, clear, accessible style, Sheldon provides real estate investors and business owners with actionable steps to climate-proof their investment portfolio.

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