Navigating the Changing Insurance Market: How Economic Conditions and Natural Disasters Impact Property Owners

This article is presented by NREIG. Read our editorial guidelines for more information.

As insurance premiums continue to rise, property owners must understand the effects of economic conditions and natural disasters on the insurance market. These insights offer practical guidance for real estate investors navigating a dynamic and unpredictable market.

Extreme Weather Events and Natural Disasters

Maintaining a healthy book of business in areas prone to frequent extreme weather events and natural disasters, such as Florida, Louisiana, and California, is a challenging task for insurance carriers. The severity of natural disasters, such as hurricanes, tornadoes, and wildfires, has increased in recent years, making it even more difficult for insurance carriers to keep up.

Faced with these conditions, insurance carriers have had to review their payout history, resulting in higher premium rates and deductibles across the board.

Labor and Material Shortages

Construction costs have skyrocketed over the past four years due to a persistent shortage of skilled labor. The struggle to find and retain skilled workers has forced construction companies to offer higher wages, driving up project costs. Labor accounts for about half of overall expenses, making it a significant factor in the rising costs of construction.

Supply chain disruptions, initially caused by COVID-19 factory closures, have also led to delays in construction material production. The scarcity of materials has only further inflated prices. Natural disasters, like the ones mentioned, have only exacerbated the supply and demand challenges faced by the construction industry.

The domino effect of these cost increases is evident: with labor and materials costing more, property repairs become more expensive, requiring insurers to pay out more when a loss occurs. This ultimately leads to carriers raising premium costs for insureds.

Diminishing Buying Power

The persistent escalation of inflation over the past four years has significantly reduced consumers’ buying power and impacted various sectors, including construction. As the cost of essential goods and services rises, construction workers naturally seek higher wages to keep up with the increasing cost of living, creating a cycle of rising costs.

Not only are construction materials more expensive due to supply chain issues, but the purchasing power of the dollar has also diminished, making money less effective in covering necessary expenses. Insurers are contending with the increased cost of labor and materials while also facing the broader impact of inflation on the economy.

The diminishing value of the dollar translates to insurance carriers allocating more funds to cover the same level of property damage, prompting an increase in premium rates.

Unless you’re comfortable self-insuring at a higher level and making substantial changes to your coverage, it will be challenging to significantly lower your insurance costs. However, there are proactive measures you can take to mitigate the impact of these market changes on your insurance premiums.