In the aftermath of Hurricane Dorian, Swiss Bank expects damage in the Bahamas to reach between $500 million and $1 billion. However, Business Insurance predicts commercial losses, including business interruption, could reach $7 billion. Many of these losses, especially residential losses, will be uninsured, according to Dow Jones Newswires.
High-value commercial properties like hotels and resorts have sustained serious damage, Business Insurance reports. Given the extensive flooding and high winds, which reached 185 miles per hour or more, the claims process will be slow, with rebuilding problematic. The insurance industry does not predict a quick recovery because after any major storm, rebuilding goes slowly as the search for vendors, materials and labor delays rebuilding. Insurance experts expect losses to hit the reinsurance market, as well. In this hurricane, the United Nations predicts more than 60,000 people will need aid as the death toll continues to rise.
While the commercial real estate market has taken significant steps to prepare against possible catastrophic losses, weather remains one of the most difficult variables to predict. Weather experts foresee that warming oceans will cause more weather disruptions near coasts, and inland properties parched for water will suffer more fire and soil-subsidence issues. Commercial real estate can “do only so much to prepare,” according to Bisnow. Today’s building codes protect against the strength of some of the current storms as hurricane season in the US continues through late November. Builders construct modern commercial buildings with technology designed to help withstand major storms, but much of the US’s commercial real estate inventory existed before municipalities created codes that require buildings to be more resilient.
Rates Harden, Capacity Shrinks
The insurance industry has responded by increasing rates and deductibles in catastrophe-prone areas. However, these increases and increased risk retention tactics have not yet slowed real estate investors from building in such areas. Insurers may respond by limiting the availability of coverage in higher-risk areas. In one instance after Hurricane Harvey in Houston, a 60-property commercial real estate firm saw its property rates increase 20% and its deductibles increase from 1% and 2% to up to 5% of insured values.
In light of increased flood and other risks, homeowners and risk managers alike are taking time to sit down with their agents and discuss coverage. Insurers are offering more prevention help, with carriers like Chubb suggesting risk management and loss prevention tips. Interior inspections post-loss are possible with some carriers, as well, when real estate managers are not on site.
The number of carriers in Florida currently writing flood insurance is increasing, which is coverage commercial real estate managers certainly should consider. Florida’s east coast is particularly vulnerable to high storm surges. In October of 2018, Hurricane Michael hit the Florida panhandle hard, as well. More investors are taking a close look at flood insurance, according to Florida insurance agents.
Real estate investment experts warn that climate change will crush value for those real estate investors unprepared for the weather challenges of the future. While big firms invest in resources to calculate climate risk to properties, even the most sophisticated modeling data cannot keep pace with climate change impacts. In 2017, floods, earth movement and wildfire caused more than $300 billion in damage to both commercial and residential US real estate, according to CNBC. Rainfall on the east coast from May through July 2018 was three times normal level. Temperature extremes are now the norm.
Strategies for Real Estate Investment Risk Management
Some strategies today’s real estate investors use include those listed below, according to CNBC.
- Analyzing physical risks for current properties and possible acquisitions
- Incorporating climate risk into the due diligence process before investing
- Adding new risk mitigation measures
- Diversifying portfolios and considering climate considerations as part of their fiduciary duties
- Investing directly in risk mitigation measures
- Working with local policymakers to influence local climate mitigation strategies
Real estate investors were disappointed when they turned to their insurers for location specific climate risks. Since insurers can reprice annually, they don’t necessarily take a long-term view of climate risk and its impact on rates, experts say. Instead, real estate investors turn to emerging technology firms that can provide climate data on flooding, wildfire and wind risks directly to them. This enables investors to determine the risk to specific properties so that climate change can be a part of the calculated ROI when considering a new acquisition. Climate is now a part of a new paradigm in real estate investment driven by dangerous, even catastrophic weather. Ensuring a balanced real estate portfolio based on climate and storm exposure is a key emerging risk management factor in today’s commercial real estate market.
While insurers have the luxury of the annual renewal process to increase rates when they suffer underwriting losses, the carriers increasingly turn to technology to help mitigate risks pre-disaster. FM Global, which writes a large portfolio of commercial real estate, is heavy on loss prevention. Rather than relying solely on FEMA maps, which can be very outdated, the company developed its own flood maps they predict will yield stronger results than maps furnished by the federal government.
Chubb has its own fire brigade that it dispatches to protect its insureds’ high-value homes during fire in wild-land urban interface. The idea for insurers is to spend money now to reduce claims spend. This adds a benefit to policyholders if they can avoid losses. Deductibles, lost revenue and other challenges faced by commercial property investors can pose a challenge. If losses don’t occur, property owners and managers gain peace of mind even if insurers charge extra for these mitigation services.
In light of today’s climate change challenges, commercial real estate investors seek better ways to manage their existing properties. However, that due diligence must now extend to new real real estate acquisitions, because climate change is a threat the real estate industry cannot ignore. Real estate investors nationwide must now consider climate threats as a key factor in their risk management programs.
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