Today’s Impacts on Property Insurance Costs—And What Investors Can Do About It

This article is presented by NREIG. Read our editorial guidelines for more information.

As insurance premiums climb, property owners need to grasp how economic conditions and natural disasters affect the insurance market. These insights provide practical guidance for real estate investors navigating a dynamic, unpredictable market. 

Why Did My Premiums Go Up in 2023?

There are multiple reasons, including the following.

Extreme weather events

Maintaining a healthy book of business in areas prone to frequent extreme weather events and natural disasters, like Florida, Louisiana, and California, is inherently challenging for insurance carriers. It becomes even more difficult when natural disasters like hurricanes, tornadoes, and wildfires increase in severity, as they have over the last few years. 

Faced with these conditions, insurance carriers have found it necessary to review their payout history, leading to higher premium rates and deductibles across the board. 

Labor and material shortages

It is no secret that construction costs have surged over the last four years due in large part to the persistent shortage of skilled labor. The struggle to find and retain skilled workers has forced construction companies to offer higher wages, subsequently increasing project costs, as labor accounts for about half of overall expenses. 

Supply chain disruptions, initially arising from COVID-19 factory closures, led to delays in construction material production. The scarcity of materials only further inflated prices. Natural disasters like those mentioned have further perpetuated supply and demand challenges faced by the construction industry. 

The domino effect of these cost increases is evident: With labor and materials costing more, property repairs become more expensive, requiring insurers to pay out more when a loss occurs—ultimately leading carriers to raise premium costs for insureds.

Diminishing buying power

The persistent escalation of inflation over the past four years has significantly reduced consumers’ buying power and impacted various sectors, including construction. As the cost of essential goods and services rises, construction workers naturally seek higher wages to keep up with the increasing cost of living, creating a cycle of rising costs. Not only are construction materials more expensive as a result of supply chain issues, but the purchasing power of the dollar has also diminished, making money less effective in covering necessary expenses.

 Insurers are contending with the increased cost of labor and materials while also facing the broader impact of inflation on the economy. The diminishing value of the dollar translates to insurance carriers allocating more funds to cover the same level of property damage, prompting an increase in premium rates. 

What Can I Do to Keep My Insurance Costs Stable?

Unless you’re comfortable self-insuring at a higher level and making substantial changes to your coverage, you will find it difficult to lower your insurance costs significantly. However, there are proactive measures you can take to prevent further increases. Consider the following strategies to help keep your insurance costs stable.

Shop annually, and get creative with coverage

As most property owners are aware, we are still experiencing a hard market, and in times like these, I recommend shopping for insurance annually. While you won’t find much fluctuation in price (the most you will save is pennies on the dollar), there is real value in shopping for benefits, policy structure, and included coverages. 

Of course, if you are comfortable taking on a bit of additional risk, there are a few ways you can get creative with your coverage to offset some of the increased costs. A good insurance agent can guide you in the right direction while letting you know about the positive and negative implications of any changes to your insurance policies. Always talk with your lender and insurance agent before making or requesting changes, and be sure you have a full understanding of any additional risk. 

Stay on top of property maintenance

A well-maintained property is less likely to experience costly damages, ultimately benefiting both your insurance premiums and your property’s longevity.

In addition to outlining what tenants are and are not allowed to do at the property, your lease should also specify who has what responsibilities in terms of property maintenance. At a bare minimum, they should know to contact you about any hazardous conditions at the property. 

When they move in, supply your tenants with contact information for you/the property manager, or provide a convenient way to submit maintenance requests. Once maintenance requests are received, take action as soon as possible. The sooner you/your property manager deal with potential hazards, the less likely they are to worsen and cost you more time and money. 

Require tenants to carry renters insurance

Many rental property owners include a clause in their lease requiring tenants to maintain a renters insurance policy. Not only does this benefit renters, but it also helps you save money in the long run. 

The reality is that, eventually, a tenant will engage in actions that lead to a loss, and you will have to file a claim through your property policy. But if the tenant has renters insurance, your insurer can subrogate against the liable tenant’s policy. Subrogation is the process by which the insurer can seek reimbursement from the at-fault party (or their insurer). When your carrier recovers their money, it minimizes the payout amount on your policy, keeping your rates stable over time. 

Use an independent broker

Working with an independent insurance broker, especially one who specializes in residential investment properties, is extremely beneficial. Because independent brokers represent multiple insurance companies, they can find the most comprehensive coverage at a competitive price. Moreover, a broker who specializes in obtaining coverage for apartments, single-family rentals, duplexes, etc., knows how best to protect your assets because they work with properties like yours every day. 

Final Thoughts

The best advice I can give real estate investors for the next couple of years is to be proactive. Maintain an open line of communication with your insurance agent to ensure you are maximizing the value of your coverage. Take steps to mitigate potential losses—having sound risk management procedures is a powerful tool in keeping your insurance rates stable. 

While it may seem tedious, understanding the coverages, exclusions, and gaps in your policy is crucial. When in doubt, ask your insurance agent and ensure all details are well documented.

This article is presented by NREIG

NREIG is a national, independent insurance agency, offering the most comprehensive, and flexible industry-leading insurance program for residential real estate investment properties. Our team of advisors and specialists delivers unmatched service and streamlined insurance solutions for investors with single-family and small multifamily rentals, renovation projects, and vacant homes. Seamlessly make coverage changes as your portfolio fluctuates, and pay only for the coverage you need each month.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.