The impact of rising insurance costs on real estate investors: How have insurance costs risen, and what is the effect on returns?
Insurance premiums for commercial real estate are surging at an unprecedented rate. In 2022 alone, premiums escalated by more than 20 percent year-over-year, fueling concerns that this upward trajectory will persist. Several critical factors are propelling this increase in cost. Among them, the frequency and severity of natural disasters — ranging from floods and hurricanes to wildfires — are now routinely causing damage exceeding $1 billion per incident. For example, the wildfires between 2016 to 2018 caused more insured losses than the total between 1980 and 2018 combined, according to the report, Climate change and U.S. property insurance: A stormy mix, by The Council on Foreign Relations.
Accelerated inflation is further exacerbating the surge in premiums, primarily owing to escalating construction costs associated with rebuilding efforts. In a similar vein, the phenomenon of outsized jury awards, or “nuclear verdicts” are similarly affecting insurance co