The cost of climate risk is already embedded in operating statements, lender covenants, and valuations. Premiums have jumped, carriers have retrenched from key states, deductibles and exclusions have expanded, and taxes are drifting upward. Winners will treat resilience as underwriting—baking hazard analytics, coverage structure, and hardening measures directly into basis and business plans.
1. The New Economics of Coverage (What's Actually Changed)
Homeowners insurance has surged since 2019. Nationally, homeowners insurance premiums rose ~57% from 2019 to 2024, with the steepest increases in high-risk markets. That growth rate now outpaces median homeowner income growth in many metros and reverberates through rents, common charges, and capex planning.
Multifamily isn't exempt. In the apartment sector, owners reported an average 26% year-over-year jump in property insurance costs in 2023, with some operators seeing triple-digit increases on renewals—paired with higher deductibles and new limitations. That's not a blip; it reflects loss experience, reinsurance, and catastrophe model updates flowing through to premiums and terms.
Property taxes add torque to NOI variance. For single-family comparables (a clean national time series), average tax bills rose 4.1% in 2023 to $4,062 and 2.7% in 2024 to $4,172, with outsized increases in certain metros. While tax regimes vary, the direction of travel adds another non-controllable expense to T12s and pro formas.
Carrier behavior has shifted. The underwriting pendulum has swung: State Farm stopped renewing ~72,000 home and apartment policies in California in 2024 and paused new business earlier, citing catastrophe exposure, reinsurance costs, and inflation. Farmers pulled out of segments of Florida, affecting ~100,000 policies. Expect tighter appetites, selective ZIP-code moratoria, and stricter underwriting.
FAIR Plans and public backstops are under strain. California's FAIR Plan exposure and premiums have ballooned; the plan sought a $1B assessment in 2025 and has proposed a ~35.8% average rate increase, reflecting wildfire losses and reinsurance costs. These are signals of systemic pressure, not just local politics.
2. The Hazard Tape: Frequency, Severity, and Knock-On Effects
Events are more numerous and costly. NOAA's final accounting shows 27 U.S. billion-dollar disasters in 2024 with $182.7B in total costs—near the top of the historical distribution and part of a decades-long upward trend in both frequency and losses. Underwriters, lenders, and rating agencies see that curve too.
Rents move after disasters. New research (Brookings/Georgia Tech) finds rents increase ~4–6% after a first disaster and remain elevated for years; serial disasters add another 2–3 percentage points, with high-risk ZIP codes showing rents roughly 12% higher over time. Disasters therefore affect not just expenses but revenue trajectories, resident displacement, lease-up dynamics, and affordability optics.
3. What This Means for Underwriting Today
3.1 Hazard-First Market Selection
Move beyond "regional diversification." Diversify by peril: wind/hail & convective storm corridors, wildfire/ember exposure, riverine/pluvial flood, and extreme heat. Combine:
- Third-party hazard analytics (cat models, parcel-level wildfire/flood)
- Carrier feedback (appetite lists, ZIP restrictions, facultative needs)
- Historical loss runs (yours + prior owner where available)
Corollary: Where carrier supply is thin (e.g., certain CA/FL/LA ZIPs), price in insurer selection risk and renewal friction, not just premium levels.
3.2 Premiums, Retentions, and Sub-Limits—Model Them Like Real Cash
Line-item the all-in cost of risk, not just "premium":
- Base premium + broker fees + named-storm/wildfire deductibles (often % of TIV)
- Sub-limits (freeze, water damage, sewer backup, service line, flood outside SFHA)
- Ordinance or Law (Coverage A/B/C adequacy for older stock)
- Business Interruption (BI) & Extra Expense (actual downtime—see below)
- Reinstatement provisions and reinsurance surcharges
Caution: Favor scenario analysis over single-point budgets. Use a probability-weighted retention cost (expected deductible + attritional loss share) in your year-1 and average-hold projections.
3.3 Reserves and Capital Structure
Build bigger operating and contingency reserves for: (i) renewal surprises; (ii) percentage deductibles after a named event; (iii) ordinance-driven rebuild deltas. Negotiate covenant headroom (DSCR cushions, repair escrows, extensions) recognizing that taxes and insurance drive NOI volatility.
3.4 Parametric Overlays Where They Fit
Parametric solutions (e.g., wind speed, quake intensity, rainfall) provide fast, trigger-based cash to bridge BI and deductible exposures—valuable for liquidity during recovery. Manage basis risk by aligning triggers geographically and peril-wise to the actual exposure, and by modeling historical event footprints.
3.5 Resilience That Pays (With Evidence)
Certain upgrades reduce claim frequency/severity and can improve insurability:
FORTIFIED roof/re-roof standards (IBHS) reduce wind/water intrusion; Alabama now mandates meaningful discounts and has shown materially fewer and less severe claims for Fortified homes (Hurricane Sally study).
Wildfire hardening (ember-resistant vents, ignition-resistant roofs/siding, defensible space). IBHS's Wildfire Prepared Home standard focuses on roofs, ember-vulnerable features, and near-home vegetation—actions that meaningfully lower wildfire loss potential and can unlock insurer credits in some states.
Bottom line: treat resilience CapEx as risk-adjusted yield defense. Include it in year-1 funds-from-operations and your renewal narrative to carriers.
4. Pricing Dislocations: Opportunities Where Others Can't Insure
Carrier exits and capacity rationing have created pricing gaps that sometimes exceed fundamental loss expectations—particularly in pockets of California, Florida, and Louisiana. Sponsors who can (a) procure coverage at sustainable terms and (b) execute targeted resilience CapEx can buy quality assets at discounts to intrinsic value, especially in processes where many bidders are "off risk." Evidence: large carriers pausing new business or non-renewing in CA, and selective withdrawals in FL, have pushed more owners to FAIR Plans or Citizens, raising friction for less experienced buyers.
Tactics to convert dislocation into alpha:
- Pre-market a coverage plan with your broker (structure, markets, mitigations) and submit with your offer
- Underwrite two renewal cases (base + stressed) and demonstrate covenant resilience to the lender
- Capture seller uncertainty around coverage by anchoring price to your insurable plan, not generic headlines
5. Debt, Covenants, and Lender Alignment
Expect lenders to:
- Require evidence of full replacement-cost coverage (mind any sub-limits)
- Scrutinize named-storm/wildfire percentage deductibles and BI adequacy
- Stress test tax and insurance growth in DSCR models
Best practices:
- Include insurance & tax sensitivity tables directly in your financing memo
- Build a capitalized reserve sized to deductible exposure and projected increases
- Consider parametric or deductible buy-down layers to protect DSCR headroom post-event
6. Underwriting Checklist (Institutional Cues)
- Market screen by peril: cat maps + ZIP appetites + carrier feedback
- Structure: document exclusions/limitations, confirm Ordinance or Law limits, test BI period adequacy against realistic downtime after a major event (12–24 months in heavy-damage scenarios)
- Reserves: set aside event deductibles and a renewal variance buffer
- CapEx plan: FORTIFIED roof specs, defensible space, back-up power, floodproofing
- Overlay: evaluate parametric trigger viability and pricing
- Exit: assume buyer and lender diligence on insurability—avoid hair you can't explain
7. Modeling Taxes & Insurance (Small Changes, Big Differences)
Property taxes. Use jurisdiction-specific reassessment rules and recent levy trends. Nationally, ATTOM data shows $4,062 average in 2023 (+4.1% y/y) and $4,172 in 2024 (+2.7% y/y). Large metros often skew higher and reappraise more frequently—build that into your sensitivity bands.
Insurance premiums. Use two-stage modeling:
- Base case at quoted terms with a 3–5 year renewal curve
- Stress case with (i) higher deductibles, (ii) 10–25% premium shock, (iii) tightened sub-limits after a loss
Cross-check: the ~57% homeowners premium rise since 2019 is a useful macro anchor; treat multifamily's 2023 ~26% increase as a plausibility check for apartment portfolios.
8. Market Signals to Watch in 2025–2026
- NOAA's 2024 disaster count/cost now closed at 27 events / $182.7B—a high watermark that informs reinsurer pricing and primary appetites
- FAIR Plan dynamics in CA: rate filings, assessments, and reinsurance placements—key for standard-market competition and availability
- NFIP Risk Rating 2.0 implementation: more risk-consistent flood pricing affects take-up rates, closing conditions, and total housing cost in coastal and inland floodplains
- State-level mitigation credits (e.g., IBHS FORTIFIED discounts in Alabama; emerging wildfire credits in the West). Expect widening premium differentials between hardened and non-hardened assets
9. Case-Style Examples (How Sponsors Operationalize This)
A. Sunbelt garden multifamily (1990s vintage, wind/hail corridor)
Underwrite roof replacement to FORTIFIED standard; install enhanced attic ventilation and secondary water barrier during re-roof. Finance a deductible buy-down and a parametric wind layer (county-level 1-min sustained wind trigger) sized to 6–9 months of NOI + deductible.
Result: Lower attritional losses; faster liquidity post-event; stronger renewal story.
B. Western infill (WUI adjacency)
Scope ember-resistant vents, 0–5 ft non-combustible zone, Class A roof, upgraded gable ends, and eave enclosure. Document mitigation with photos and third-party verification; leverage any state-mandated mitigation credits.
Result: Expanded carrier panel, improved terms, lower non-renewal risk.
C. Coastal mixed-use (flood + wind)
Combine dry floodproofing of service rooms, elevate critical equipment, and maintain portable power options. Coordinate NFIP or private flood with property policy to avoid gaps; ensure BI calculations reflect utility outages and supply-chain delays.
Result: Reduced downtime; clearer lender comfort and tenor.
10. Common Underwriting Pitfalls (To Avoid Now)
- Treating premium quotes as static—renewal terms can change based on loss experience or after a regional event
- Ignoring percentage deductibles (named storm/wildfire) when sizing cash and lender reserves
- Under-specifying Ordinance or Law coverage on older assets (codes are expensive)
- Assuming BI durations that are too short for real reconstruction timelines
- Overlooking basis risk when adding parametrics—triggers must match your exposure
11. Actionable Next Steps for Sponsors and Allocators
- Re-underwrite insurance at the asset and portfolio level: confirm deductibles, sub-limits, exclusions
- Commission a resilience audit tied to IBHS/industry standards; cost out the top 3 payback measures
- Pre-market your risk story with brokers and lenders—submit mitigation plans with quotes
- Model tax drift by jurisdiction; stress cases for reassessment cycles
- Explore parametric for cash-timely recovery; quantify basis risk and payout sufficiency
- Track backstops (FAIR Plans, NFIP); changes signal capacity/price shifts ahead
12. Policy Context That Affects Your Basis
FAIR Plans: growing exposures, reinsurance costs, and potential surcharges/assessments push system-wide pricing and availability. California's 2025 actions illustrate the mechanics.
NFIP (Risk Rating 2.0): moves flood pricing closer to parcel-level risk; affordability debates continue, but for underwriting you should assume greater risk-consistency rather than blanket subsidies.
13. Signals Inside the Operating Statement (How It Shows Up Fast)
- Insurance: premiums, higher retentions, narrower water damage coverage, and sub-limits on key perils
- Taxes: rising assessed values or rate adjustments; budget for appeals and lag effects
- Repairs/CapEx: roof ages and façade maintenance drive both insurability and deductibles; tie your CapEx calendar to renewal dates
- Utilities & BI: power resilience (gensets, ATS) shortens BI and can support covenant compliance post-event
14. Synthesis for Investment Committees
For new acquisitions and re-caps, append a Climate & Coverage Appendix to the IC deck:
- 1-page hazard profile by peril and ZIP
- Coverage schematic (limits/deductibles) + broker term sheet
- Mitigation plan with milestone dates and expected carrier credits
- DSCR/tax/insurance sensitivities (base vs. stressed)
- Exit proof: marketability under assumed 2027–2029 carrier appetites
Subscribe for weekly insights
If this analysis helps you sharpen your models and IC memos, consider subscribing to our weekly newsletter. We distill the most material shifts in climate, insurance, taxes, and capital markets into a short brief tailored for real estate sponsors, LPs, and allocators. CLICK HERE TO SUBSCRIBE.
FAQs
1. Are insurance costs likely to keep rising at the same pace?
Rates are tied to loss outcomes, reinsurance pricing, construction inflation, and regulatory constraints. The 2019–2024 ~57% homeowners increase should moderate as loss experience normalizes and mitigation scales, but high-risk ZIPs will likely see above-trend volatility. Underwrite a glide path, not a freeze.
2. Do resilience upgrades actually reduce premiums—or just make me insurable?
Both. Evidence from IBHS/Alabama's Fortified program shows materially fewer and less severe claims—and Alabama mandates meaningful wind-portion discounts. In wildfire zones, IBHS Wildfire Prepared Home measures improve insurability and may unlock credits under state rules. Expect bigger availability and terms benefits than pure dollar cuts in the hardest markets.
3. How should I size reserves for deductibles?
Identify the largest percentage deductible (e.g., 2–5% named storm on TIV) and hold at least one event's cash (deductible + 3–6 months of operating shortfall) per asset cluster. Consider parametric or deductible buy-down to reduce liquidity risk.
4. Will FAIR Plans and NFIP remain reliable backstops?
They're essential but under pressure. California's FAIR Plan has sought assessments and rate hikes post-wildfires; NFIP's Risk Rating 2.0 aligns premiums to property-level risk, raising affordability debates. As an owner, assume greater self-reliance and plan for program changes.
5. Do rents really rise after disasters—and is that investable?
Research shows 4–6% rent increases after a first disaster and compounding effects with multiple events (up to ~12%). That's not a green light to speculate; it reflects displacement and reduced supply. Ethically and operationally, plan for resident stability, BI coverage, and fair-housing compliance.
6. Which line items are most often missed in T12s and pro formas?
Under-modeled: Ordinance & Law (A/B/C sufficiency), water damage sub-limits, service line coverage, BI duration realism, broker and surplus-lines fees, and tax appeal costs.
7. How do I talk to lenders about this without scaring them?
Lead with controls: your mitigation plan (IBHS/FORTIFIED or Wildfire Prepared), coverage structure, reserves, and sensitivity work. Lenders reward process maturity and DSCR headroom more than optimism.
8. Is there real opportunity in markets like Miami, LA, or coastal Texas?
Yes—where you can secure coverage and execute hardening. Data show premiums rising faster in high-risk metros; some owners exit on insurance fatigue. If you can underwrite the risk accurately and control the operational response, you can buy dislocated cash flows. (Example signals: premium growth outpacing incomes; insurer retrenchment; backstop pressure.)
Conclusion
Climate risk has migrated from the footnotes to the front page of your underwriting model. The math is straightforward: higher volatility in premiums, deductibles, and taxes reduces free cash flow and narrows covenant cushions—unless you (1) select markets by peril, (2) structure coverage with eyes wide open, (3) fund resilience that changes loss outcomes, and (4) maintain liquidity for when—not if—the next event arrives. That approach won't eliminate uncertainty, but it converts unpriced hazard into managed risk, which is the essence of durable real-estate returns.
_______________
Sources:
- Homeowners insurance +57% 2019–2024: Harvard JCHS. Harvard Joint Center for Housing Studies
- Multifamily insurance +26% (2023): NMHC; Multifamily Dive. National Multifamily Housing Council+1
- Property tax averages: ATTOM (2023–2024). ATTOM+1
- 2024 U.S. billion-dollar disasters: NOAA/CRS. Congress.gov
- Post-disaster rent effects: Georgia Tech/Brookings/NLIHC. Georgia Tech News+1
- Carrier retrenchment (CA/FL): AP; CBS; Insurance Journal. AP News+1
- FAIR Plan pressures: SF Chronicle; Reuters. San Francisco Chronicle+1
- Parametrics & mitigation: Marsh; PwC; IBHS; Alabama study. AP News+3Marsh+3PwC+3
.svg)
