The unfortunate reality for the coastal areas of the United States is that they have become increasingly familiar with the catastrophic changes in weather patterns over the past decade. As The National Oceanic and Atmospheric Administration (NOAA) noted, the U.S. experienced 28 separate weather and climate disasters that cost at least $1 billion in damages in 2023. For the coastlines of the U.S., extreme weather will make its presence known through hurricanes, tropical storms, and floods.
NOAA also indicated earlier this year that the 2024 Hurricane Season could be one of the most active hurricane seasons on record. In just the 5-6 weeks of hurricane season, we have seen two hurricanes impact North America. First was Hurricane Chris, which hit Mexico, and the season's second system (Hurricane Beryl) which directly impacted the Texas Gulf Coast. Moreover, Hurricane Beryl became the earliest Category 5 Atlantic hurricane on record.
As catastrophic weather events continue to present challenges to our clients with coastal exposure – it’s essential to understand the current state of the market. In this article, we will explore the key factors influencing the coastal commercial real estate property insurance market and discuss the trends and challenges faced by property owners.
Insurance CAT capacity uncertainty & the ripple effects of Beryl
Hurricane Beryl has already had a significant impact on the insurance market. Insurers in the United States are expected to face in excess of $4.5 billion in damages caused by the hurricane. This estimate includes losses associated with wind, storm surge, and precipitation-induced flooding.
As natural catastrophes continue to take a toll on the U.S. coasts, insurance carriers’ room for adequate CAT capacity is diminishing over the past five years. However, we did see a softening of the coastal markets in Q1 and Q2 of this year due to positive results from the big January 1 Re-Insurance Treaty Renewals. Instead of rolling back capacity, we saw carriers deploy new capacity and even some carriers re-enter the coastal property market.
What to expect going forward
What does all this mean for those who have actually seen a softening of the coastal property market over the past few months, and for those with renewals coming up during the second half of 2024?
Evolving underwriting practices: Insurers have – and will continue to – adopt to more sophisticated underwriting practices to assess the risks associated with coastal commercial properties. This includes leveraging advanced modeling techniques and data analytics to evaluate the potential impact of climate change on property values and insurance losses. By incorporating these factors into their underwriting processes, insurers can better understand the risks and offer more accurate coverage options.
Market capacity and availability: The coastal commercial real estate property insurance market has experienced fluctuations in capacity and availability in recent years. Following major catastrophic events, insurers may reduce their exposure to coastal risks, leading to a tightening of the market. This can result in higher premiums and limited coverage options for property owners. However, as the market adapts and insurers gain a better understanding of the risks, capacity and availability may improve over time.
Expected pricing changes: As Lucy Clarke, President, Marsh Specialty and Global Placement, states, “Pricing for property risks continues to be impacted by the large losses in 2022, especially the residual losses still impacting clients from Hurricane Ian.” What emerges is a challenging environment for catastrophe-exposed properties. Those with significant exposures and sustained losses can expect to experience rates hikes between 50-100%. Even catastrophe-exposed properties with single-carrier placements and appealing risk profiles are facing increases between 15% and 30%. However, those accounts with minimal losses and have a property program structured with multiple carriers in a layered programs can see minimal increases…and reductions in some instances.
Importance of risk mitigation: Given the increasing risks associated with coastal properties, risk mitigation has become a critical focus for insurers and property owners alike. Insurers are encouraging property owners to implement measures to reduce vulnerability, such as installing storm shutters, reinforcing roofs, and elevating electrical systems. By investing in risk mitigation, property owners can not only reduce their insurance premiums but also enhance the resilience of their properties.
How Marsh McLennan Agency (MMA) fits in
MMA’s risk advisors understand the real estate industry and its hardships – even the unexpected ones – and we work with you to anticipate new and emerging risks that may arise. While preparing for coverage, some questions to ask yourself as a risk professional include:
Do you know your claims loss history? MMA proactively and aggressively addresses claims from the onset to better focus risk management efforts and help to achieve optimal outcomes.
Are you feeling lost in a sea of policies? MMA can help you consolidate and manage your insurance program to maximize your portfolio efficiencies.
Does your broker know your current story and have strategic market partners who understand this industry? We work together to help improve your risk profile and position your organization in a favorable light to the market. With strong carrier partnerships, we place you with insurance companies that know and, more importantly, want your business.
Are you satisfied with the level of innovation in your insurance program? MMA offers alternative ways to help transfer your risk. To meet your business needs, we can provide risk-funding tools such as parametric insurance, captives, and self-insurance.
Risk professionals and senior leaders must anticipate and proactively manage risks to thrive amid uncertainty in a dynamic industry. As underwriters more closely scrutinize a business’s risk capacity, buyers will be challenged to differentiate their risk during the renewal process and may need to rethink elements of their insurance contracts. Doing so effectively will require an approach rooted in data and analytics. Begin preparing for any catastrophic risks that may impact your coastal property by diving into Marsh McLennan Agency’s Business Insurance Trends Report.
