The U.S. property and casualty insurance market is undergoing major changes due to rising climate risks and increasing claims. In states with high risks, insurers struggle to adjust premiums accordingly. Instead of just raising rates, many are cutting back on coverage, tightening rules, or leaving these markets entirely.
This trend is especially impacting the commercial real estate (CRE) sector. Developers and investors are finding that insurance is becoming more expensive, harder to get, or sometimes completely unavailable in risk-prone areas.
At the recent 2025 Real Estate Capital Markets Conference, Pari Sastry, an assistant finance professor at Columbia Business School, shared insights on how these shifts affect real estate insurance. She pointed out that stakeholders are now forced to rethink risk management and investment strategies.
Rising Claims and Development Risks
Insured losses for property and casualty insurance have surpassed $100 billion globally for five years. In 2024, the U.S. alone accounted for about two-thirds of the global losses, at $135 billion. Factors like climate change, inflation, and natural disasters drive these rising claims. Specifically, development in high-risk areas, such as regions prone to floods and wildfires, is a major contributor.
Recent studies show a significant increase in housing development in danger zones. According to Redfin, 55% of U.S. homes are now in high fire-risk areas, nearly double what it was in the 1980s. As more people move to these vulnerable regions, the risk of catastrophic losses grows, leading to higher insurance costs.
Regulations Complicate Matters
In many states, insurers face strict regulations preventing them from raising premiums to match the risks. For example, states like California and Florida require regulatory approval for any premium hikes, which often keeps rates artificially low. This mismatch leaves insurers struggling to stay profitable, pushing them to exit high-risk markets or limit coverage options.
CRE investors are now in a tricky position, as it becomes more challenging to find adequate insurance.
Creating Solutions
Developers and investors can potentially lower their insurance premiums by incorporating resilient design features into new buildings—such as wind-resistant roofs and flood barriers. However, the real impact of these investments on premiums is still uncertain.
Some large firms, like Blackstone and Apollo, are exploring alternative insurance solutions, including self-insuring and using catastrophe bonds, which help them manage risks while maintaining coverage. This approach gives them better control over their insurance costs during uncertain times.
On the regulatory side, some states are looking to update rules to allow insurers to adjust their premiums based on actual risk. While this could mean higher rates in high-risk areas, it might also keep insurers from leaving those markets.
Governments also have a role to play. Investing in infrastructure improvements, such as better flood control and wildfire prevention, can reduce the impact of climate change. Stronger building codes and zoning laws limiting development in danger zones can further help manage future risks and insurance costs.
Final Thoughts
The shifting insurance landscape shows how climate risks influence the real estate market. Innovative strategies like self-insurance may provide some relief, but the industry must adapt quickly to meet the challenges ahead. By working together, stakeholders can find effective ways to manage risks while ensuring the future of real estate development.
For more detailed insights, you might want to check the presentation titled "The Growing Impact of Climate Change on Real Estate Coverage."
Sources:
- Swiss Re (Global Insurance Losses)
- Redfin (U.S. Housing Stock Data)
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