"Pay no attention to that man behind the curtain!"
----- A common challenge -----
Landlords have been hit with a mixed bag of challenges over the last few years, but here's one unifying challenge...
"Insurance is clearly in for another significant increase" (Equity Residential)
"...the other pressure point is insurance, even though it's only 5% of OpEx. It's still a difficult market. ...it's still elevated relative to normal trends." (Avalon Bay)
"2023 has been elevated given above average increases in R&M and insurance." (Essex)
----- Feeling the pain -----
Per Moody's Analytics, landlord insurance costs have increased by 8% per year in recent years.
"Commercial property owners, already struggling with high interest rates and rising vacancies, face exploding insurance costs that keep hitting new highs. Natural disasters, inflation and a shrinking reinsurance market have pushed insurance premiums to record levels, echoing the surge in home insurance rates for much of the U.S. That leaves many landlords in a bind."
"For some property owners, the impact of rising insurance costs has been more punishing than rising interest rates. Many landlords still have low debt costs because they signed long-term, fixed-rate mortgages before 2022 that don’t expire for years to come. But insurance contracts typically renew every year. That means virtually every property owner has been forced to either sign a new policy at a higher cost, or skip insurance altogether."
"Intensifying natural disasters are a big reason for the increase, particularly in cities vulnerable to wildfires, floods or storms. The cost of reinsurance has also increased, trickling down to higher property insurance rates. Meanwhile, inflation has pushed up the cost of repairing or rebuilding damaged properties. In some cases insurers choose to not even provide quotes, leaving those who do free to charge higher premiums."
"Owners of rental apartment buildings are particularly vulnerable because they have to pay for insurance. Commercial landlords can typically pass the costs on to their tenants..."
Surging Insurance Costs Have Come for Office Landlords
WSJ (9/26/23)
----- Piercing the insurance veil -----
Are insurance companies taking advantage of pricing power? Doesn't look like it. Margins are low, and earnings are down significantly.
So, what's going on? Insurance is a complicated business, but the culprit seems extremely obvious: A long-term surge in losses. We pulled claims data on three of the largest P&C insurers and found that their loss payouts are increasing by 10%+ per year vs. 0-3% growth in the early 2010s.
In sum...
-- P&C margins are low
-- P&C profits are down
-- Claims are surging (10%+)
-- P&C insurers are increasing rates to offset claims (8%+ growth)
Will insurance costs continue to surge?
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