We’ve touched on insurance a few times in Wind in the Willows, but the world of insurance has changed a lot in the last year. It’s been a popular topic lately because it’s changing the way buildings and businesses can be underwritten. Many pundits are quick to point to inflation and the changes in building product costs as the driving force behind the large changes, and there is some validity to that. But what’s implied in that analysis is that insurance costs decrease with inflation.
The Fed may be able to slow some of the changes in insurance costs, but with the deadliest fire in more than a century in Maui, and devastating flooding in Vermont and Pennsylvania, this summer has built upon the case for higher premiums. As we’ve discussed before, in regulatory environments that don’t allow for rapid changes in premiums, it’s become very difficult to support the insurance business model in some places.
The situation is untenable in every corner. We’ve spoken before about insurance pricing rocketing higher, and worse, leaving entire regions where they can no longer operate at any semblance of a profit, but the problem is spreading and it’s preventing transactions. We’ve seen it up close when we underwrite multifamily properties, but it’s far from isolated to commercial markets. Homes on the water, or the desert, or near the wrong river now require such enormous premiums that these properties are now only available to those who can float the entire value of the property in cash. The banks will not take on the risk of debt on these properties in such a location without insurance.
There may still be some transitory piece of this, but it’s very possible that this could bifurcate the population… or it could mean a very large adjustment in price for the underlying assets. Frankly, it’s probably both, but there will be fortunes won and lost as we figure this out. In the meantime, whether you want to surf or ski, some of the best tourist locations on the planet just took a huge hit. We wish them all a speedy recovery.