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Extreme Weather's Influence on Multifamily Insurance Costs

“For those in hotbeds of catastrophic perils, it’s going to be a rough year.” That’s how Chip Stuart, the North American practice leader for Hub Real Estate Specialties, summed up what’s ahead for property risk management in 2023.

Hub predicts that insurance premiums for the multifamily sector will spike 20 percent on average this year–and as much as 200 percent in high-hazard zones, providing a major challenge to investors, developers and owners. “You want to be below that average,” he noted. “You want to show your underwriters that you’re best-in-class.” And, he added, lenders are aware of the trends.

There are ways to meet the expectations of insurers and, by extension, financial institutions. But those strategies are tied closely to the changing dynamic between climate risk and insurance. One key point is that insurance rates aren’t going up simply because of the increase in natural catastrophes. Even though well-documented supply-chain issues seem at last to be subsiding, they’re still wreaking havoc on the cost of construction materials. The same can be said about the inflationary environment and the threat of a recession. 

“Premium increases are being 100 percent credited to catastrophes,” according to Jimmy Clark, executive director of Gallagher’s Southeast real estate and hospitality practice. “But a large percentage of the increases that we’re seeing is due to building costs.”

Wind, rain and fire are the most obvious of climate related risks, but residents on fault-line locations such as California (as well as a number inland) must grapple with earthquake risks. As the Los Angeles-based Stuart observes, in the absence of smaller earthquakes—those measuring less than 4 on the Richter Scale—the threat of a large catastrophic event rises. 

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