The home insurance market across the U.S. is facing massive upheaval. A combination of more frequent natural disasters, rising litigation costs, and increasing property rebuilding costs have led many insurance companies to exit markets or reduce coverage. Homeowners struggle to find affordable policies, while some are left with limited options or none whatsoever. For real estate investors, navigating this new reality means confronting higher costs and uncertainty and embracing new opportunities.

Read on to learn more about why homeowners are losing coverage and what you can do to mitigate the situation. 

The industry has also tightened the age and useful life of the roofs, which can be difficult to qualify for insurance through a private carrier.

The Perfect Storm: Why Insurers Are Pulling Back  

Natural disasters, like wildfires, floods, and hurricanes, are intensifying and imposing huge losses on insurance companies. In addition, litigation costs from claims disputes have cut further into profits. At the same time, rebuilding costs have skyrocketed due to pricier materials and labor, making insuring homes less profitable and riskier, forcing insurers into difficult choices.  

Many major companies, like State Farm, Allstate, and Nationwide, have stopped writing new home insurance policies in markets like California, Florida, and Louisiana. They also drop many existing customers or exclude wind and hail coverage in disaster-prone areas. Citizens Property Insurance Corp., the last-resort insurers in many states, have seen policy counts surge as people lose private coverage. While Citizens is often not a homeowner’s first choice, it is often the only option. 

Patrick Rossi of Great Florida Insurance in Deerfield Beach, FL says, “Given the high rates of reinsurance, the homeowners insurance markets have been tightening up capacity or shutting down for new business. The industry has also tightened the age and useful life of the roofs, which can be difficult to qualify for insurance through a private carrier putting the burden on Citizens, the state insurance of last resort, to take on the influx of policies”.

State and local governments worry that economic ripple effects could significantly harm communities in the long term.  

The Impact on Homeowners: Less Choice, Much Higher Costs   

For homeowners, the pullback of insurers means losing their existing coverage, paying much higher premiums, and having limited options for a new policy. Some may only be able to get catastrophic coverage for significant damage or must settle for a Citizen’s policy. Others may be declined altogether, primarily if a home is owned in a high-risk area.

The result is uncertainty about securing coverage, risking financial hardship when disaster strikes, or being unable to secure/keep their mortgages without adequate and affordable insurance. Some may face bankruptcy if uninsured properties are damaged or destroyed. State and local governments worry that economic ripple effects could significantly harm communities in the long term.  

The crisis will worsen without changes, and more insurers will likely stop servicing Florida altogether.  

The Florida Insurance Crisis: A Case Study  

No state has been harder hit than Florida, where insurers cite outsized risks from hurricanes and a litigious legal environment. Major carriers, like USAA, Travelers, and Nationwide, have pulled out, and most remaining insurers restrict coverage or charge high premiums. Floridians pay an average of $4,231 per year for home insurance, nearly triple the U.S. average.  

Solutions proposed for Florida include legal reform to reduce litigation costs, strengthening building codes, and incentivizing hazard mitigation to make homes more disaster resistant.  As a state-run company, Citizens also needs overhauling to operate more like a private insurer. The crisis will worsen without changes, and more insurers will likely stop servicing Florida altogether.  

With savvy decisions, investors can achieve strong returns even as insurers continue pulling back nationwide.

Opportunities Amid the Turmoil for Real Estate Investors   

While challenging, this period of market turmoil also presents opportunities for real estate investors. 

Specialty insurance for investors: Some insurers now provide comprehensive, tailored coverage for investor property portfolios under one policy. Investors can choose appropriate coverage types and limits for different properties. These specialized policies may offer good value compared to traditional home insurance.

Join local real estate investor groups: Groups provide valuable networking and education for property owners. Members share strategies to reduce insurance costs, find contractors to mitigate risks, and get referrals to trusted insurance agents. Groups also advocate for members and may negotiate lower rates.

Diversify your property portfolio: A diversified portfolio limits impact from issues affecting any market or asset class. Invest in other regions with fewer natural disasters and insurance problems. Consider commercial or multifamily properties with different risks and insurance needs. Use strategies like wholesaling, crowdfunding, and REITs, which require less direct property ownership.  

Adapt properties for changing risks:

• Evaluate how climate change may affect property risks and values long-term.
• Improve energy efficiency, use alternative energy, and enhance water conservation to reduce environmental impacts.
• Support local disaster preparedness and community resilience initiatives to protect housing markets.

The home insurance industry faces substantial challenges highlighting the increasing costs and risks of property ownership. For real estate investors, succeeding in this new reality means diligent risk management, portfolio diversification, and embracing opportunities arising from market turmoil. With savvy decisions, investors can achieve strong returns even as insurers continue pulling back nationwide.

The insurance challenges confronting real estate investors are complex with no simple or single solution.

Navigating Higher Insurance Costs: Strategies for Investors

Real estate investors must develop profitable strategies despite higher home insurance costs. Some approaches to consider include the following:

• Pass on costs to tenants: The most straightforward option for rental property owners is increasing rent to cover higher insurance premiums. However, there are limits to how much can be passed onto tenants before reducing occupancy or the ability to attract renters. Investors must weigh these trade-offs carefully based on local markets and property types.
• Shop around at renewal: While options may be limited in some areas, investors should always compare quotes from different insurers when policies are up for renewal. Explain any hazard mitigation or risk reduction steps to help obtain the best available rates.
• Raise deductibles and reduce coverage: Investors can lower premiums by opting for higher deductibles and less coverage, especially for risks they feel comfortable retaining themselves. However, make sure the remaining coverage and limits are still adequate to protect properties from major losses.
• Bundle multiple policies: Bundling commercial property coverage with other policies, like general liability, business interruption, or auto insurance, can qualify for bundling discounts from some insurers. The more policies in the bundle, the higher the potential savings.   
• Stop offering property coverage: For some properties, the costs of insuring and securing coverage may outweigh the benefits. Investors not obligated by laws or lenders to carry insurance for specific assets could consider halting coverage altogether for these medium- or lower-value holdings. However, this approach only makes sense for risks that would not pose a significant financial hardship if a major loss were incurred.
• Sell appreciated assets: In stable housing market conditions where properties have gained substantial value over time, investors may opt to sell certain high-risk, high-cost assets. Profits earned from selling at a premium can be reinvested in other properties or markets with better insurance rates and lower exposure to hazards. This strategy frees up capital that might otherwise have to fund burdensome insurance costs.

The insurance challenges confronting real estate investors are complex with no simple or single solution. But with careful cost-benefit analysis, proactive risk management, and flexible business strategies, investors can design effective workarounds even in the face of fewer options and more expensive premiums. Investors with a finger on the pulse on the insurance front will achieve the most tremendous long-term success.