The US Real Estate market has seen significant and steady growth over the past five years largely due to favorable economic conditions and legislation. The rise of opportunity zones and continued investment in the multifamily and industrial sectors have been a large part of this continuous growth. While investments have done well, environmental catastrophes have surged giving cause for insurance companies to rethink how to manage real estate investments in catastrophe (CAT) exposed areas.
One of the most significantly impacted states over the past few years due to environmental catastrophe has been California. The 2018 California wildfire season has resulted in insurance claims of over $12BN. More broadly, total insured catastrophe losses across the globe totaled $140 billion in 2017 and $80 billion in 2018. For reference, the average for the previous 30 years was $41 billion. The multifamily sector has bared the brunt of these losses. As a result, insurance rates for multifamily assets across the US have seen sharp and continued increases to date.
How will recent environmental trends affect insurance pricing for the next 12 months?
Insurance carriers are under price pressure due to the recent increase in major storms, climate change, natural disasters, and an increased cost of property repair. Properties along the Gulf and Atlantic coast are seeing increases in their rain and flood claims.
In the next year experts are estimating 15-25% rate increases for standard assets and approximately 30% for high wind and hail areas such as TX, OK, CO and others. Reinsurance rates are rising while insurers are minimizing their coverage capacity. Due to large amounts of capital from pension funds and hedge funds flowing into insurance firms, increased competition among insurers has kept rates from skyrocketing relative to recent losses, but that is unlikely to be sustainable.
Being cognizant of market trends is important, but investors must also be wary of an asset’s environmental history to confirm a property’s value and de-risk their investment.
How to conduct a thorough environmental investigation on your property
To review a property for environmental hazards, a preliminary assessment can be completed through a tool known as the Transaction Screen Process (TSP) developed by the American Society for Testing and Materials (ASTM). The TSP is a questionnaire that provides a snapshot of a property’s environmental condition. The results inform an individual if a more comprehensive Environmental Site Assessment (ESA) is needed.
An ESA has three tiers: Investigation (Phase I), Sampling and Analysis (Phase II) and Remediation Investigation (Phase III). Often a Phase I will be ordered and the report will state that no additional testing is needed. Upon the discovery of a recognized environmental concern (REC), a Phase II is generally recommended which requires testing of soil and groundwater samples. Phase III when necessary includes the plan and execution of a remediation plan.
Many of the most prevalent environmental and regulatory exposures that are uncovered through environmental due diligence include:
- Contaminants from historical usage of property or neighboring properties
- Soil and groundwater contamination
- Ammonia based air-emissions
- Debris containing hazardous materials
- Lead, asbestos and radioactive material
- Past landfills and solid waste disposal areas
Unsure if your property is adequately covered for environmental risks from a property or climate perspective? Contact us for a review of your current property policy.
Check out our blog on hurricane and earthquake insurance to learn more about the topic!