Landlord insurance costs have skyrocketed over the last few years—largely because insurance companies have paid out so much in claims from natural disasters.
Insurance rate hikes have averaged 26% per year, according to the New York Housing Council. Rising insurance premiums continue fanning the flames of inflation, long after other drivers have cooled.
Homeowners and multifamily property insurance costs alike have shot to the moon, and show few signs of slowing. In fact, many insurance companies have decided to stop issuing new policies in high-risk states like California, Florida, and Louisiana.
How is climate change affecting multifamily property insurance costs? More importantly, how can you keep your landlord insurance costs manageable to keep your cash flow positive?
Keep the following in mind as you navigate the increasingly stormy waters of climate change and insurance.
How much landlord insurance costs
Landlord insurance for the average single-family rental property costs around $1,895 per year, according to real estate website BobVila.com. That’s around 25% more expensive than homeowners insurance rates for comparable properties—despite not covering furniture and personal belongings the way that homeowner policies do.
Why the difference? Because renters statistically do more damage to their homes, and because landlord policies include liability coverage.
As for multifamily property insurance, it typically costs $1,000–$3,000 for every million dollars of coverage, per Obie Insurance. But multifamily insurance costs are rising fast, as much as 28% annually in some markets.
Compounding the problem, landlord insurance policies don’t include some types of coverage that property owners should often have. Multifamily and other landlord policies don’t include rent default insurance for example. It also doesn’t include security deposit coverage. If residents stop paying rent, or cause significant property damage to the unit, the landlord takes a loss.
Climate change insurance impact
In 2023, the damage caused by natural disasters globally reached a record $380 billion according to Aon Insurance. That’s 31% higher than the 21st century average.
Insurance companies paid out $118 billion in losses, with the remaining damage uninsured. For the fourth year in a row, insurers paid out over $100 billion in damages.
The majority of these losses came from severe convective storms. These heat-related storms caused six of the top ten most expensive events in the US last year. It comes as little surprise, given that 2023 was the hottest year on record in human history.
It also costs far more to repair and replace multifamily and other commercial properties than it did even five years ago. Concrete products cost 37% more than they did four years ago, per the US Department of Labor. Fabricated structural steel costs a dizzying 65% more, and machinery and equipment costs have jumped 22%.
And that says nothing of the leap in labor costs in recent years. Construction wages have jumped 22% over the last four years.
In short, the combination of more natural disasters and greater construction costs make for a perfect storm of spiking landlord insurance costs.
The problem of reinsurance
Insurance companies also take out insurance policies to hedge against losses.
These policies, known as reinsurance, are bought and sold on a global marketplace. But that globalization means that disasters halfway across the world can also impact the pricing of your multifamily insurance policy.
Indeed, reinsurance rates have shot through the roof in recent years. Reinsurance costs have risen as much as 50% in some markets over the last year alone.
These global insurance connections add even more complexity to an already tangled insurance market. Your landlord insurance premiums can go up for reasons far less direct than the local claims made in your area over the last few years.
What are insurance companies doing about climate change?
You already know one way insurance companies have responded to more expensive claims: they’ve hiked premiums.
Many insurance companies have also pulled out of states at high risk of natural disasters. The two largest homeowners insurance companies in the US, State Farm and Allstate, have both announced discontinuing new policies in California. Farmers Insurance joins a dozen or so other insurance companies who have abandoned the Florida market in recent years.
In the case of California, regulation plays a role. A 1988 law called Proposition 103 limits how much insurers can charge based on wildfire losses over the last 20 years. But wildfire losses in the last decade have far exceeded the 20-year average. A report by actuarial firm Milliman found that California wildfires in just two years—2017 and 2018—cost insurance companies more than their profits from California policies over the last 25 years combined. So, many insurance companies have simply pulled the plug on California policies rather than hassle with California’s red tape and wildfire risk.
That in turn leaves fewer options for homeowners, landlords, and commercial property owners.
It also dissuades some homebuilders from, well, building new homes. Skyrocketing property casualty and builders’ risk premiums are preventing some new development projects, especially affordable housing developments. That only worsens housing affordability in the US.
What about government policies?
With private insurance companies fleeing from high-risk areas, many property owners have been forced to enroll with backstop government insurance programs (known as FAIR Plans). The coverage provided by state run FAIR Plans nearly doubled from 2013-2022.
Government insurance programs don’t exactly boast a proud history. Over 50 years ago, the federal government created the National Flood Insurance Program, which has racked up billions in debt. As a bureaucracy, it simply can’t charge enough to cover its losses from claims and its bloated operating costs. Taxpayers end up subsidizing it as a result.
The government could conceivably shore up Low Income Housing Tax Credit (LIHTC) rules to spur more affordable housing development however. Current rules require property operators to put the property back in service within a tight timeframe, regardless of the loss suffered from property damage. The federal government could allow more flexibility for named storms and declared disaster areas such as Hurricane Sandy or the October 2017 Northern California wildfires. It could also offer more generous tax credits for low-income multifamily property insurance coverage.
How you can navigate climate change and insurance
Increase your coverage
The majority of homeowners appear to be underinsured according to Policy Genius. Over two-thirds don’t have policies that guarantee replacement cost, if they had to rebuild their homes.
Many multifamily operators have failed to expand their coverage to account for skyrocketing replacement costs, as labor and material expenses have risen sharply over the past four years. To ensure premiums provide adequate protection, operators should consider conducting a thorough assessment to determine the current cost of rebuilding. This proactive step can help you understand if your existing coverage is sufficient or if adjustments are needed to avoid potential financial shortfalls.
Conduct your own risk assessment
As you explore ways to keep landlord insurance costs manageable, start by focusing on markets with minimal risk of extreme weather and natural disasters. Conduct your own local risk assessment for disasters like hurricane damage, wildfires, earthquakes, floods, and tornadoes. You may decide to look at new markets, if the risk of runaway insurance premiums in your current market look high.
To conduct your own assessment, start by identifying the types of disasters most likely to occur in your area through historical data and local reports. Analyze your property's vulnerabilities, including building structures and emergency plans. Use risk assessment tools like FEMA’s Hazus to evaluate the likelihood and potential impact of these hazards, considering geographical and climate factors.
Review your current insurance policies to understand coverage and the risk of premium increases, then develop a mitigation plan to address identified risks. This approach not only protects your assets but also helps you decide whether to explore new markets if insurance premiums in your current area become unsustainable.
You can also conduct environmental assessments at the property level before buying a parcel of land or multifamily property. Does the property sit in a flood plain? What’s the wildfire risk and hurricane risk?
Create strong relationships
Depending on your scale as a multifamily operator, you could negotiate bulk discounts on insurance policies. It also helps to build closer relationships with a few insurance companies. Technology comes and goes, but old-fashioned human relationships can help you stay covered, and affordably.
Final thoughts
Multifamily property insurance costs have soared to dizzying heights over the last three years. There’s plenty of blame to go around, from climate change to inflation to wage growth to material costs.
As you forecast your operating costs moving forward, err on the side of higher insurance cost projections. Too many multifamily property owners have found themselves with negative cash flow over the last few years, in part due to skyrocketing premiums.
Lastly, don’t ignore the risk that your multifamily insurance carrier will drop you—and that you’ll struggle to find replacement coverage. That risk goes doubly in markets with frequent disasters and high premiums.
For multifamily operators, climate change risk isn’t vague or nebulous. It’s measurable in higher landlord insurance costs and thinning options for coverage.