2023 Fall Issue of Urban Land - 131

by the value and revenue of a commercial real
estate property, and higher-value and higherrevenue
commercial real estate properties
are often located in coastal areas with higher
exposure to hurricanes, this trend held, even
when looking at insurance costs as a share of
revenue.
This relationship between hurricane exposure
and insurance expense aligns with anecdotal
evidence that hurricanes are a driving
force behind insurance challenges in the Gulf
Coast region. It also demonstrates how climate
change interacts with other insurance
market factors. For example, the property
insurance landscape in Florida consists mostly
of small, nondiversified companies. Thus, if a
hurricane hits, it's likely to affect many properties
in those companies' underwriting portfolios,
presenting significant financial challenges.
Although wildfire's contribution to pricing is
not yet showing up clearly in the data, wildfire
in California is causing financial impacts to
insurers. According to Moody's Investors Service,
California, property and casualty insurers
and their reinsurers had $36 billion in losses
from the 2017 and 2018 wildfires, with their
2017 loss ratio over 200 percent.
Danielle Lombardo, a partner at Lockton,
summarizes the issue: " Insurers are in the business
of making money, and just when they
think they've reached rate adequacy, there are
significant catastrophe losses from weather
events they hadn't previously underwritten for,
like severe winter freeze storms, hail, tornadoes,
and wildfires. The first half of 2023, prior
to the height of hurricane season, catastrophe
losses are double the 10-year average. " This
lack of profitability for insurers is affecting all
other players in real estate markets.
Adjusting to the new era of risk
Market participants are facing overlapping
challenges. Extreme events are causing
unprecedented losses, both insured and uninsured,
which result in business interruption
and replacement costs that have implications
for asset NOI and credit risk. However, this
story is focusing on the insurance itself, where
there is a growing risk that insurance expense
inflation, alongside other expense increases,
could outpace revenue growth. This trend
presents a cash flow risk with implications for
assets' value, refinancing, and probability of
default.
Figure 3. Multifamily insurance costs and US natural disasters
Sources: NOAA National Centers for Environmental Information (NCEI), Moody's Analytics CRE, Moody's Analytics CMBS
FALL 2023
URBAN LAND
131
INDUSTRY VOICES

2023 Fall Issue of Urban Land

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