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May 1, 2023

Catastrophe (CAT) risk challenges facing coastal properties

Stephen McCord

The United States, particularly its coastal areas, has become increasingly familiar with the changes in weather patterns recently. As the National Oceanic and Atmospheric Administration (NOAA) notes, the U.S. experienced 18 separate weather and climate disasters that cost at least $1 billion in damages in 2022. For the coastlines of the U.S., extreme weather will make its presence known through hurricanes, tropical storms, and floods. 

In California, the United States Geological Survey predicts that about half a million people and $100 billion worth of property on the coasts will be put at risk during the next century. Florida, too, is facing bouts of costly weather, exemplified by the catastrophic impact of Hurricane Ian, which caused between $50 and $65 billion in insured damages. These increasing weather incidents are resulting in costly side effects such as a lack of carrier capacity enhanced by rising rates and a trend of properties not being valued correctly.

Less carrier capacity leads to increased rates.

As natural catastrophes continue to take a toll on the U.S. coasts, insurance carriers’ room for adequate CAT capacity is diminishing. Because carriers are rolling back their capacity, commercial property owners along the coast have to contend with rate, valuation , and deductible increases.  

Data gathered by Marsh shows that the fourth quarter of 2022 was another quarter of increased property rates. In fact, it was the 21st consecutive quarter where rates had increased. This increase results in carriers looking to mitigate their costs. As Lucy Clarke, President, Marsh Specialty and Global Placement, states, “Pricing for property risks continues to be impacted by the high level of losses in 2022, especially resulting from Hurricane Ian.” What emerges from these two trends is a challenging environment for catastrophe-exposed properties. Those with a poor loss history or risk quality are staring down increases that could range between 25% and 150% in the first half of 2023. Even catastrophe-exposed properties with appealing risk profiles are facing increases between 15% and 50%.   

The undervaluation of coastal properties.

In addition to not proactively obtaining the right amount of coverage, properties are discovering coverage gaps in their current appraisals. A study by Kroll found that 68% of buildings valued from 2020 to 2021 were underinsured by 25% or more, and to a more significant extent, nearly 90% of appraised buildings were undervalued. Some coastal states are also grappling with properties that do not have any insurance coverage. Take Florida, for example, where approximately only 18% of the state’s residents have any sort of flood insurance for their homes.

Due to these misevaluations and lack of protection, many property owners and carriers are confronted with larger-than-expected losses with premiums that are ill-equipped to deal with them. This, in addition to increasing rates and lacking capacity, is complicating the process of finding insurance coverage and protection for property owners across the coasts of the U.S.

How Marsh McLennan Agency (MMA) fits in 

MMA’s risk advisors understand the real estate industry and its hardships – even the unexpected ones – and we work with you to anticipate new and emerging risks that may arise.  While preparing for coverage, some questions to ask yourself as a risk professional include:

  • Do you know your claims loss history? MMA proactively and aggressively addresses claims from the onset to better focus risk control efforts and help to achieve optimal outcomes.
  • Are you feeling lost in a sea of policies? MMA can help you consolidate and manage your insurance program to maximize your portfolio efficiencies.
  • Does your broker know your current story and have strategic market partners who understand this industry? We work together to help improve your risk profile and position your organization in a favorable light to the market. With strong carrier partnerships, we place you with insurance companies that know and, more importantly, want your business.
  • Are you satisfied with the level of innovation in your insurance program? MMA offers alternative ways to help transfer your risk. To meet your business needs, we can provide risk-funding tools such as parametric insurance, captives, and self-insurance. 

Risk professionals and senior leaders must anticipate and proactively manage risks to thrive amid uncertainty in a dynamic industry. As underwriters more closely scrutinize a business’s risk capacity, buyers will be challenged to differentiate their risk during the renewal process and may need to rethink elements of their insurance contracts. Doing so effectively will require an approach rooted in data and analytics. Begin preparing for any catastrophic risks that may impact your coastal property by diving into Marsh McLennan Agency’s Business Insurance Trends Report.

Visit the Marsh McLennan Agency Business Insurance Trends Report page to learn more. 

Contact an MMA representative today.