Recent trends influencing property insurance costs include:
- Weather-related catastrophes. The past decade has seen an upward trend in the frequency and severity of destructive weather-related incidents including storms, hurricanes, and wildfires. Damages and future concerns have especially risen in coastal areas.
- Replacement costs. An increase in materials and equipment costs combined with a shortage of skilled labor have led to more expensive rebuilding projects.
- Fraud. Bad actors who file fraudulent damage claims have also contributed to increased property insurance costs.
- Re-insurer challenges. Smaller insurance companies that often provide coverage in markets where larger insurers choose not to compete have been more selective themselves due to rising re-insurance costs. The lack of cost-effective re-insurance options for these insurers leads to even less competition and even higher insurance premiums in those markets.
The dynamic nature of these factors can lead to significant changes in insurance premiums over time. Property insurance costs from just one year ago might no longer be suitable for a bank to use when assessing a borrower’s current repayment capacity.
Additionally, borrowers who let their insurance coverage lapse due to rising costs can quickly turn what was once considered a stable loan into a problem loan. They might believe they can rely on the value of their raw land to repay their debts, but they are often mistaken. When a widespread disaster causes several of these situations to trigger at once, the consequences on a bank’s loan portfolio can be significant.