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As insurance premiums rise, property owners need to understand how economic conditions and natural disasters will impact the insurance market. These insights provide practical guidance for real estate investors navigating a dynamic and unpredictable market.
Why will my premium increase in 2023?
There are multiple reasons, some of which include:
abnormal weather phenomenon
Maintaining healthy business performance is essential in regions prone to frequent extreme weather events and natural disasters, such as Florida, Louisiana, and California. Challenges for insurance companies.It becomes even more difficult if Natural disasters Hurricanes, tornadoes, and wildfires have become more and more severe in recent years.
Faced with this situation, insurance companies decided they needed to review their payment history, leading to higher premium rates and deductibles across the board.
Labor and material shortages
It’s no secret that construction costs have skyrocketed over the past four years, largely due to a persistent shortage of skilled labor. Struggling to find and retain skilled workers has forced construction companies to offer higher wages, resulting in higher project costs as labor costs account for about half of total costs. .
Initially, production of construction materials was delayed due to supply chain disruptions resulting from factory closures due to the coronavirus. Material shortages only drove prices higher. Natural disasters such as those mentioned above further perpetuate the supply and demand challenges facing the construction industry.
The domino effect of these cost increases is clear. Rising labor and material costs also increase the cost of repairing a property, forcing insurance companies to pay more in the event of a loss and ultimately forcing insurance companies to raise premiums for insureds. It will be.
Decline in purchasing power
The sustained escalation in inflation over the past four years has significantly reduced consumer purchasing power, impacting various sectors, including construction. As the prices of essential goods and services rise, construction workers naturally seek higher wages to accommodate the increased cost of living, creating a cycle of rising costs. As a result of supply chain issues, not only are construction materials more expensive, but the purchasing power of the dollar has also declined, making money less effective at covering necessary expenses.
While insurance companies grapple with rising costs for labor and materials, they also face the broader economic impact of inflation. When the value of the dollar decreases, insurance companies allocate more funds to cover the same level of property damage, prompting higher premium rates.
How can I keep my insurance premium stable?
Unless you are comfortable self-insuring at a higher level and making significant changes to your coverage, you may find it difficult to significantly lower your insurance costs. However, there are proactive measures you can take to prevent further increases. Consider the following strategies to stabilize your insurance costs.
Shop every year and get creative with your coverage.
As most property owners are aware, we still face a tough market. During times like these, it is recommended that you purchase insurance every year. While the price doesn’t vary much (you’ll only save pennies on the dollar), there’s real value in purchasing the benefits, policy structure, and included coverage.
Of course, if you can tolerate a little extra risk, there are several ways you can tweak your coverage to offset some of the increased costs. A good insurance agent will guide you in the right direction, informing you of the positive and negative implications of changes to your insurance policy. Always consult your lender and insurance agent before making or requesting any changes to fully understand any additional risks.
Stay on top of property maintenance
A well-maintained property is less likely to experience costly losses, ultimately benefiting both your insurance premiums and the life of your property.
In addition to outlining what tenants can and cannot do on the property, lease It should also specify who has what responsibility for maintaining the property. At a minimum, you should know that you should contact customers about unsafe conditions within your facility.
Upon move-in, provide tenants with your/property manager’s contact information or a convenient way to submit maintenance requests. When you receive a maintenance request, please respond as soon as possible. The sooner you or your property manager address a potential hazard, the less likely it is to worsen and cost you more time and money.
Require tenants to purchase renters insurance
Many rental property owners include a clause in their rental agreement that requires tenants to maintain a renter’s insurance policy. Not only is this beneficial for renters, but it can also help you save money in the long run.
The reality is that the tenant will end up doing something that results in a loss and will need to file a claim through real estate insurance. However, if the tenant has renters insurance, the insurance company can subrogate against the responsible tenant’s insurance policy. Subrogation is the process by which an insurance company can seek reimbursement from the at-fault party (or its insurance company). Once your carrier collects your money, your premium payments will be minimized and your rates will remain stable over time.
Use an independent broker
Working with an independent insurance broker, especially one that specializes in residential investment properties, can be extremely beneficial. Independent brokers represent multiple insurance companies, so you can find the most comprehensive coverage at a competitive price. Additionally, brokers who specialize in obtaining coverage for apartments, single-family rentals, duplexes, and more work with properties like yours every day, so they know how best to protect your assets.
final thoughts
The best advice I can give real estate investors in the coming years is to be proactive. Maintain open communication with your insurance agent to maximize the value of your insurance. Take steps to mitigate potential losses. Establishing sound risk management procedures is a powerful tool for stabilizing insurance premiums.
Although it may seem like a hassle, understanding your insurance coverage, exclusions, and gaps is critical. If in doubt, contact your insurance agent to ensure all details are well documented.
This article is brought to you by NREIG
NREIG is a national independent insurance agency offering the most comprehensive and flexible industry-leading insurance programs for residential real estate investment properties. Our team of advisors and specialists provides unparalleled service and streamlined insurance solutions for single-family and small multifamily rentals, renovation projects, and vacant property investors. Seamlessly change coverage as your portfolio changes and pay only the coverage you need each month.
Note by BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.
