Coastal communities, often celebrated for their scenic beauty, are increasingly facing insurance losses, primarily due to environmental factors. These communities are grappling with the growing challenges of rising sea levels, the mounting threat of flooding, and high-risk water damage. Natural disasters and environmental concerns have been slowly creating challenges in the insurance market, as providers are more frequently avoiding coverages that are growing in risk. While insurance is still available for many coastal communities, pricing and accessibility may dwindle if climate events continue at their current rate.
The Climate “Bubble”
What’s now referred to as the “climate bubble” describes locations where commercial and residential homes are most susceptible to climate events and high-loss damages. While there are areas outside of food zones, such as wildfire-prone areas, coastal communities are often considered the most at risk.
They face the effects of rising sea levels, tropical storms and hurricanes, flooding, and general water damage. As weather events have become more frequent and severe, losses have surpassed most insurance policy limits and are slowly becoming uninsurable. These areas, such as Florida, California, Louisiana, and Alabama, are all experiencing frequent events that incur losses that require additional coverage. While the government has stepped in with state funding for some key weather events, insurance providers are still struggling to maintain adequate returns against these losses in climate bubble locations.
Some insurance providers have already exited states like Florida, California, and Louisiana, forcing commercial and residential owners to rely solely on government funding which is minimal.
Climate Impacts on the Real Estate Market
Insurance prices continue to rise, and the cost of property ownership is becoming too expensive for many individuals. This combination is causing property values to deflate, and creating a general understanding of overvaluation in the current market. However, due to the climate risks, insurance prices aren’t likely to decrease soon. So, many owners will continue to rely on state-funded insurance coverage, refinance their homes to reflect current property values or sell their property.
In general, the real estate market will become more difficult to get into given the rising cost of living for lower value homes. Buyers may not want to relocate to an area where insurance is challenging to secure, or extremely inflated in costs.
Is State-Funded Insurance Coverage Enough?
For those looking to buy in the climate bubble, or those already in the market trying to secure coverage, you may be wondering if state-funded coverage is enough.
First, it's important to know that those with private coverage can have their policies dropped at the time of renewal if they are located in a high-risk area. So, even if coverage is currently active, it is important to consider state-funded options in the event that you lose coverage. Most states offer FAIR plans that provide coverage for standard losses in high-risk areas.
State coverage can be an adequate method of risk management in some locations. For example, Florida’s state-backed program, Citizens, is expected to reach a million new policies by the end of 2023. Citizens pulls funding from a number of sources, including premiums, the Florida Hurricane Catastrophe Fund, and private reinsurance. However, they do require separate flood insurance, which can be expensive, and state-funded programs are typically more expensive than a private insurance policy as is.
Some owners are foregoing coverage entirely, with the thought that the cost-to-coverage ratio is sufficient to be an effective financial measure of risk management. If it's financially possible, securing any level of coverage in a high-risk area is recommended as the likelihood of an event leading to a loss is high.
State legislatures are working closely with insurance providers to offer better coverage options for high-risk areas that make sense financially, but currently, options are limited for properties in the climate bubble.
Are Coastal Areas Actually “Uninsurable”
Headlines are deeming coastal areas to be uninsurable, which isn’t entirely true. Most properties in these locations can secure some type of coverage or maintain their current policy, but it comes at a high cost.
As we look to the future, the question of being uninsurable becomes more relevant. Currently, climate events are increasing in frequency and severity, but the averages are still taking into consideration years when events weren’t quite as high. If, however, climate events continue to rise at their current rates, insurance providers will have no choice but to pull out entirely or increase premiums even higher than their already expensive costs.
So, while insurance may still be available, the question is whether the cost of insurance is beneficial to the risk of a loss. The answer will depend on the property value itself, premium cost, chance of a climate event, and general location. Owners in these locations can benefit from a risk management consultation with a professional who can help outline their potential risks, best financial options, and plan for the future.
Property Insurance with ECBM
ECBM is a family run, private insurance solutions provider with extensive knowledge and experience in commercial and residential property coverage. We understand the challenges owners are facing when it comes to securing affordable coverage in high-risk areas. Our brokers and consultants can collaborate with you to build an insurance package that provides adequate coverage at a competitive price. For more information on our services please contact us.
