Property owners and real estate investors understand how important it is to protect your asset through property insurance. But as the frequency and severity of environmental catastrophes continue to rise, the cost of property insurance premiums is rising with it. The Global Insurance Market Index found that insurance premiums rose 17% year over year in the United States and 20% in Q4 2020.
What's causing property insurance rate increases
But natural disasters aren't the only cause of rate spikes. Less competition in the marketplace, low interest-rate environments, and, in general, fewer insurance providers in existence today are also pushing premiums up. Insurance companies are reliant on earning a return on the premiums collected to help cover settlement costs and costs of operations. Low interest rates and volatile investment environments make it more challenging for insurance carriers to achieve the necessary returns to cover potential losses.
Increases in property insurance can directly impact an investment property's affordability or financeability. Twenty percent increases in policy rates when it comes time to renew can equate to a significant increase in expenses, pushing cash flow or net operating income (NOI) down, which in turn could throw off certain lending ratios required by banks or other lenders.
Property insurance for residential and commercial real estate varies. Commercial property often offers the chance to bundle insurance coverages, providing a more economical policy when compared to residential property, but any property regardless of type that has extenuating risk factors -- such as environmental hazards, flood zones, etc. -- will have the hardest time finding an affordable policy in the current climate.
How investors can prepare
Thankfully, the rate of increase has slowed and the Global Market Insurance Index believes the U.S. has reached somewhat of a plateau. Investors should still prepare for around a 10% - 20% rate hike. Those who are preparing to purchase an investment property should seek initial quotes to have a more accurate understanding of what the property will cost to insure. This will ensure your ratios fall within the necessary lending guidelines and will still produce the desired return on investment.
If and when your policy expires, shop around for different quotes to see which company can provide the best coverage at the best price, but don't be surprised if this year's cost is far higher than in the past. Making sure you're only electing what is necessary and doing improvements that will reduce your risk and liability, thus lowering your insurance cost, can also help save money while improving a property's life and value over time.