With Billion-Dollar Storms Bearing Down, Property Owners In High-Risk States Search For Insurance Options

A new Deloitte report indicating states with the greatest risk of severe weather could see insurance costs double by 2030 is the latest hit for commercial property owners still reeling from the last round of cost increases. 

Climate change and inflation have been a double whammy for property insurance costs, and no relief is in sight. Searching for solutions, property owners are turning to alternatives like risk-pooling or insurers of last resort. These strategies can allow owners to keep doing business in popular states like California, Florida and Texas, but come with uncertain costs and degrees of effectiveness.  

“What we’re telling our clients is, ‘If you want to save money, you can’t keep looking at [raising your] deductibles,’” said Ron Guerena, a Woodruff Sawyer partner and its senior vice president for property and casualty. “There has to be some other structural format in the way you finance your risk to be able to minimize your costs.” 

California is ranked highest based on its expected annual loss score, followed by Florida, then Texas, according to a Deloitte Center for Financial Services analysis of Federal Emergency Management Agency data. States with the greatest extreme weather risk could see an average monthly insurance cost increase of $3,077 per building today to $6,062 per building in 2030, a 10.2% compounded annual growth rate.

Insurance in a higher-risk, extreme weather state could cost 24% more than the national average by 2030, according to the report. These predictions come as experts predict a hurricane season with above-average storm activity. 

“The last five years in the U.S. have been our warmest years on record, so you have to think about the probability of intense heat waves. They're expected to increase with global warming, which could lead to increased convective storms, more natural catastrophes, more flooding, storm surges,” said Denise Perlman, president of national business insurance at Marsh McLennan Agency.

Taking on more financial risk is unfavorable in the eyes of most lenders, particularly those financing smaller businesses. As severe weather drives instances in which policyholders must file claims, insurance brokers have to look closely at risk financing strategies that complement the business strategies and capital structure of their clients, Guerena said. 

“Climate change is occurring, and this proliferation of extreme weather,” said Tim Coy, senior research leader for commercial real estate at Deloitte. “The rise in cost to insure real estate is not going away anytime soon, realistically.” 

The U.S. had 28 separate billion-dollar extreme weather events in 2023, a 56% increase from 2022 and 180% from 10 years ago, Deloitte’s report states. Before hurricane season started on June 1, a storm likely to cost at least $5B hit Houston. 

“If it's a straight-line estimation, based on how the trajectory is moving, we could get up to almost 42 [billion-dollar storms per year] by 2030,” Coy said. 

Along with climate change and inflation, insurance providers are also impacted by the rise of reinsurance costs and man-made loss drivers like regulatory action or inaction or legal system abuse, said Gary Sullivan, senior director of emerging risks for the American Property Casualty Insurance Association. 

“Our members have told us at the present, they're most concerned about the inflationary pressures that are occurring, because the claims of today are reflected in the rates of tomorrow,” Sullivan said. 

As costs rise, insurance brokers and consultants increasingly recommend self-insurance and counsel businesses about increasing their deductibles or pooling their policies. 

Insurance brokerage Woodruff Sawyer is more often talking to its brokers and clients about different available options as questions have increased in the past six months to a year, said Guerena. 

Renea Burns, national real estate eminence leader at Deloitte, has advised companies that show interest in creating captives, which are separate legal entities created within an insurance carrier that allow organizations to assume some or all of their own risks, according to a Marsh McLennan Agency report. Captives are “insured-owned” entities and are a type of self-insurance. 

Heffernan Insurance Brokers Managing Senior Vice President Ben Stern said this approach is typically employed for the first layer of insurance that clients have. The captive could cover the first $5M to $10M in losses, then traditional insurance would step in for damage beyond those amounts, he said. 

Those who take this route ultimately have the backing of an insurance carrier but save money by taking on the underwriting risk and profits, as the premiums for that layer are paid to the captive rather than a traditional insurance company.

Businesses have to maintain a minimum capital in the captive entity, but they are allowed to invest that capital and get returns, Burns said.

For some, savings can be significant.

"We’ve experienced clients comparing $9M in premium and deductible costs in traditional property insurance programs versus $7M in premium and deductibles in captive insurance programs, or a $2M delta," Stern said. In that instance, the client had a large multifamily portfolio spread out across the country.

But the cost differential varies widely depending on the company, and the process for establishing a captive is nuanced. The practice may not be right for every business, Burns said, and requires expert guidance to set up.

That guidance, of course, comes with costs of its own. These include feasibility studies, legal formation, licensing, managing fees, actuarial services, insurance taxes, claims liability, reinsurance and more, Guerena said. Larger corporations are more likely to see benefits outweigh the costs, but savings could also vary by year. 

“Over time there should be savings,” Guerena said. “The real benefit is that they can better control their cost of risk and stabilize the variability in cost.” 

For those businesses that aren’t large enough to justify a captive on their own, group captives are one option, Guerena said. 

Brad Young, Tampa, Florida-based senior director of insurance services for insurance brokerage Franklin Street, said many of his clients are interested in pooling multiple businesses or properties on one traditional policy. This enables policyholders to pay lower premiums since they are combining their maximum claims with other groups.

As private insurers have increasingly pulled out of high-risk areas, some commercial property owners turn to insurers of last resort. Qualifications vary by state, but insurers of last resort are generally intended for owners who would otherwise be unable to secure insurance for their properties. 

Citizens Property Insurance Corp. is available to any property owners in Florida as long as private insurance would be at least 20% more expensive than Citizens’ pricing, Young said. Citizens became the largest insurance carrier in Florida in recent years, though private insurers have assumed some of its policies, decreasing its policy count. 

The number of policyholders turning to California’s FAIR Plan has surged as the largest property insurers, including State Farm, said they would no longer write property policies in the state, Politico reported. The probability of a major wildfire overwhelming the system turned that insurer of last resort into a “ticking time bomb,” the article states. 

If there is a major fire, for example, FAIR will have to impose a fee on customers to pay out claims, according to Politico. Insurers of last resort in Florida and Louisiana have already had to levy these fees after hurricanes ate into their reserves.

“We are one event away from a large assessment,” FAIR President Victoria Roach told a legislative committee, as reported by Politico. “There’s no other way to say it, because we don’t have the money on hand [to pay every claim] and we have a lot of exposure.”

The Texas Windstorm Insurance Association offers coverage to properties in 14 coastal counties, including a small portion of Harris County, that are otherwise denied coverage in the private market. From the first quarter of 2023 to Q1 2024, TWIA’s commercial policy count increased by 7.3% and its total exposure increased by 37.3%, according to the association’s data.

“When private markets get more selective about the risks that they are willing to take on, our count goes up,” Senior Legislative & External Affairs Specialist Aaron Taylor said. 

Guerena said there is no alternative insurance option that is the most popular for commercial property owners, stressing that each policyholder must be considered on a case-by-case basis. 

Occasionally, businesses explore alternatives but find that traditional insurance is still the most affordable fit for them, brokers and researchers said. The Deloitte report recommends prevention measures CRE owners can do themselves, including risk assessments, enhancing security and installing flood monitors. 

Building fortification has become a much hotter topic. During the past two years, underwriters have started asking for capital expenditure schedules and canceling policies in some locations if they don’t meet certain quality requirements, Guerena said.

Insurers sometimes provide discounts when risk mitigation is implemented, the American Property Casualty Insurance Association’s Sullivan said. Each dollar spent on mitigation can save up to $13 on repairs, according to the National Institute of Building Sciences. 

What people forget about catastrophic property insurance is that it’s not meant to cover loss on a regular basis, which is why group captives and other alternatives can be beneficial to policyholders, Guerena said.

“Unfortunately, with the floods, hurricanes and tornadoes, it's become more of [a frequently used policy], and that's why we're in the mess that we're in,” he said. 

CORRECTION, JUNE 7, 3:48 P.M. CT: This article has been updated to correct Ron Guerena’s title.