The Impact of Climate Change on the Real Estate Market: An Insurance Perspective

Climate change is one of the most significant risks faced by the real estate industry, impacting rising global temperatures, erratic weather patterns, and an escalation in natural disasters. The 19th edition of the Global Risks Report released by the World Economic Forum surveyed nearly 1,500 global experts who identified extreme weather caused by climate change as the top risk most likely to present a material crisis in 2024. The environmental shifts threatening ecosystems also present significant risks to human activities, affecting the real estate market and its insurance landscape. 

Climate Change and Increasing Risks

The real estate market has felt the effects from an increase in extreme weather events leading to never-before-seen levels of property damage. In 2023, the U.S. experienced 28 separate climate disasters, each costing at least $1 billion and totaling $92.9 billion in damages. This marks a 21% rise in the number of billion-dollar disasters since 2020 and a 35% increase over the last decade, including an escalation in extreme-weather events like winter storms in the Northeast, a catastrophic wildfire in Lahaina, Hawaii, tornado outbreaks in the central and eastern U.S., and flooding across various states.    

As rising ocean temperatures continue fueling the frequency and severity of hurricanes and other climate-related events, the real estate market faces unprecedented risks, influencing property values, investment strategies, and notably, the insurance landscape. With ocean temperatures projected to rise 0.8 to 3.5 degrees by 2050, the threat of common weather events representing peril to real estate assets will continue to increase.

Insurance Industry and Climate-Related Challenges

Insurance companies play a critical role in the response to climate change-related events, serving as key players in the management and mitigation of associated risks. Through assessing risk, advocating for resilient building practices, and analyzing vast amounts of data critical to forecasting trends, they incentivize businesses and stakeholders to prepare for the reality of climate change. 

They also play a critical role by providing financial support to aid in the recovery of disasters. In essence, insurance companies are part of both the proactive and reactive approach in the battle against climate change’s impact. However, while insurance companies are vital in this fight, they face challenges of their own with assessing and pricing insurance policies throughout areas affected by extreme weather. 

Rising Insurance Costs and Affordability

Driven by continued losses, inflation, and a troubling outlook on the future, insurance companies have been forced to increase the pricing of property coverage year over year. U.S. markets have seen a steady rise in the cost of premiums over the past two years, averaging a 10.5% increase per quarter. Driving these increases in pricing are poor quality risks, impacted losses, and concentrated catastrophe (CAT) zones, such as the Gulf of Mexico, the Atlantic Coast, and California. Yet there are legal limits to how much insurance companies can raise prices, which has led to some insurers making the decision to no longer provide coverage in high-risk areas. States such as Florida, California, and Colorado have all seen insurance companies decide against renewing certain policies and leave the states after repeated high-severity weather events. 

Higher insurance pricing and limited insurer options, coupled with inflation and an increasing cost of living, have had major impacts on the valuation of real estate, particularly in vulnerable regions. s on the valuation of real estate, particularly in vulnerable regions. 

Property Valuation and Market Shifts

The real estate industry is now incorporating climate change data and risks into the decision-making processes, focusing on location and resiliency of properties. Assets located in these vulnerable regions are becoming less desirable, leading to both price drops and losses for property owners. Despite advancement in technology and tools that allow for better mapping of flood-, fire-, and other disaster-prone areas, homeowners and municipalities tend to reject those maps, as they threaten to lower home values.

Adaptation and Mitigation Strategies

To address the impacts of climate change on the real estate market, implementing adaptation and mitigation strategies is critical. Buildings are currently responsible for approximately 39% of total global emissions. By utilizing more energy-efficient lighting and systems, installing better insulation, and investing in low-carbon heating and cooling, real estate developers can help reduce their carbon footprint  as well as lower their risk of major damage from an extreme weather event. 

Through investing in climate-resilient architecture such as weather-proofing assets, integrating hurricane-proofing measures, and ensuring electrical units are housed above storm-surge zones, real estate companies can help increase insurability and secure discounted insurance rates. Insurance companies can also incentivize risk reduction by offering discounted premiums to real estate companies that invest in reducing the carbon footprint and the resiliency of buildings.

Improved building codes, resilient infrastructure, and insurers incentivizing risk mitigation are just some of the strategies that can be utilized when facing the effects of climate change. 

Government Policies and Regulations

The role of government is also critical in addressing climate change. Through policies and regulations aimed at promoting responsible real estate practices, governments can positively impact the industry. The Inflation Reduction Act (IRA) has already made available billions of dollars in tax incentives for sustainable investments. In addition, green building codes and tax credits for leveraging renewable energy options can push real estate companies to focus on the impact buildings have on climate change and structure resiliency. 

The Need for Collaboration

As with any challenge, the need for collaboration is paramount. Real estate developers, insurance companies, governments, and other stakeholders share the responsibility of working together to not only deal with the current impacts of climate change but also to lessen the market’s collective footprint. 

The urgency to act is now, with the long-term implications of inaction being far too costly. By embracing sustainable practices and collaborations, stakeholders can mitigate the impact of climate change on the real estate market, helping inspire a more secure and sustainable future for all. 

Looking Ahead

The challenges presented by climate change to the real estate market emphasize the urgent need for adaptation and a strategic response. The increasing frequency and severity of climate-related disasters have led to significant property damage, highlighting the need for reevaluation of property development, investment, and insurance strategies. Insurance companies have a vital role to play in managing these risks while facing their own set of challenges. 

The emphasis on adaptation and mitigation strategies, such as the adoption of energy-efficient practices and investment in climate-resilient architecture, points to the critical steps needed to reduce the market’s carbon footprint and enhance its insurability. The call for collaborative efforts among various stakeholders underscores the collective responsibility to address the impacts of climate change, promoting a sustainable and secure future for the real estate market   .

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