Implications of Natural Disasters on Rising Insurance Premiums in

Coastal United States Real Estate

Bella Francois and Sophia Fucci

Introduction

Real estate is an elusive market that offers investors the opportunity of high rewards for

those willing to accept the risk. While there are many factors that affect return on investment,

climate change and natural disasters have come to the forefront of the market. Insurance costs are

rapidly outpacing rent increases and general inflation, making it one of the biggest problems the

industry currently faces (Worland, 2023 ). According to a Moody’s Commercial Real Estate

(CRE) Analytics report, property insurance expenses traditionally inflate by approximately two

to three percent per year, which is a typical expense budgeting target of underwriters, lenders,

and asset managers. However, year-over-year insurance cost growth has spiked to over 17% in

some markets in recent years. On average, nationally, CRE properties have seen about a 7.6%

annual growth rate since 2017 (Fagan, 2023). This has caused certain markets to be completely

untranslatable due to the high insurance cost, terminating the possibility of making any profit

from a project and eliminating homeowner coverage across many states.

Our research question then asks, holding other things constant, what is the effect of

natural disasters on rising insurance premiums across coastal real estate markets in the United

States? In many high-risk areas, insurance companies are rapidly exiting markets prone to natural

disasters. Our question intends to understand the implications of insurance providers only

existing in specific markets. Across the United States, insurers are growing increasingly wary of

providing services in areas likely to be affected by climate-related risk and are cautiously

selecting markets that are appealing to enter with a mitigated amount of risk. We will examine
the effects of highly limited to no insurance policies on high-demand coastal real estate, through

multi-city analysis, as many people still desire to live, work, and vacation in these regions.

Literature Review

Fredrich and Roland-Holst (2012) discuss the importance of real estate as a driver of the

economy and revenue for many states. In California, it accounts for nearly one-sixth of the gross

state product (2009), but a significant portion of California’s building stock is in high-risk areas.

Insurance providers leaving markets due to climate change and natural disaster risks are not only

a problem for homeowners and coastal communities but also economically, as states can profit

off these buildings. While California coastal communities are at risk of rising sea levels, its high

cliffs offer significant protection to many properties. As a result, we will focus our research on

East Coast markets where the shoreline does not offer this kind of protection. The direct property

risk is determined by the long-term predictability of sea level rise and the frequency and severity

of storm surges (Fredrich, Roland-Holst, 2012).

Born and Klimaszewski-Blettner identify the main factors that drive insurers’ willingness

to offer coverage in catastrophe-prone property insurance lines and compare supply decisions

and responses in the aftermath of natural disasters for residential versus commercial properties

(2013). These events result in sizeable unexpected property losses and force insurers to take

various measures to stabilize their underwriting performance. Hograrth and Kunreuther (1989)

show that willingness to provide coverage is determined by various issues, including low-

frequency, high-servery, and strongly dependent perils, increased construction activity in high-

risk areas, climate change, and global warming. Born and Klimaszewski-Blettner et al. (2013)

use data from nearly 500,000 observations by firm, by line, and by state from the National

Association of Insurance Commissioners (NAIC) annual statement files to address the question
of how insurers respond to natural disasters and increased risk in commercial and residential

properties. This data contains underwriting and financial information for all U.S. personal and

commercial properties and insurers. Ultimately, the results reveal a significant difference

between homeowners’ and commercial insurers’ responses to catastrophe in Born and

Klimaszewski-Blettner’s results. While commercial lines insurers are likely to keep their

coverage following an unexpected frequency and severity of events, homeowners do not have the

same privilege. Residential insurers are seen withdrawing from a market following a natural

disaster because of its impact on their capacity to bear risk. Insurance premiums are less

regulated, and underwriters are more flexible in their underwriting decisions in the commercial

context, which helps explain their move coverage supply in policies after natural disasters.

Additionally, Born and Viscusi et al. (2006) provide evidence that concludes catastrophic

risks reduce the total premiums earned in the state, which is not a reflection of lower rates but

rather a reflection of the reduced amount of coverage available for purchase. Results conclude

that catastrophe leads to a reduction in the net number of firms writing insurance coverage in the

state and an increase in the probability of exit from the state. These effects are most significant

for smaller firms that cannot withstand major financial shocks from disasters.

We need to consider in our research how people will continue to live in these coastal

communities and how will the insurance industry be regulated to try and prevent the formation of

monopolies. Implications of lack of insurance policies and increasing premiums can displace

entire populations, especially those who have resided in coastal areas for generations. Socially,

the effects of the insurance market in risk-prone areas will uproot entire communities and widen

the economic divide between classes. Coastal communities will continue to become less

affordable and only attainable to those who can accept highly inflated premiums.
 While a significant amount of literature covers the broad topic of the effect of climate

change and natural disasters on the real estate market, few current articles and studies

specifically focus on coastal real estate as a whole. So, our conclusions about the influence of

natural disasters on insurance policies in the coastal real estate market will be drawn from

synthesizing two studies of natural disaster coastal markets, one that examines the impact of

climate change-related natural disasters in the Florida market and one that analyzes the impact of

Hurricane Sandy on the New York market.

The study of the Florida market conducted by Kunreuther, Michel-Kerjan et al. (2011)

provides essential context to the issue of catastrophe risk in the insurance market, as it

emphasizes the idea that there has been a drastic increase in natural disasters in the past 20 years.

In fact, 15 out of the 25 most costly catastrophes between 1970 and 2010, have occurred since

2001 and all of them were natural disasters. It also quantified the insured value of coastal

property in the United States for the top 10 states at $8.3 trillion in 2011 (Kunreuther and

Michel-Kerjan et al. 2011), which further supports the importance of our research as such a large

market is at risk. It then explained why Florida is an excellent example of the coastal real estate

market risk due to its rapid population growth and the evidence of climate change in the

increased frequency of hurricanes. This study was the first of its kind to quantify the impact of

increased climate catastrophes in a market, finding that the total price of insurance for Florida,

according to their model, could increase significantly from $12.9 billion (in 1990) to up to $32.1

billion by 2040, including a broader range of climate change scenarios (16). An increase of this

size will most certainly lead to property insurance becoming too expensive for commercial real

estate development, leading to a decline in real estate production and the CRE market.
 The study of the impact of Hurricane Sandy on the New York market by Addium and

Echholtz et al. (2023) is the first of its kind as it focuses explicitly on the impact of the natural

disaster on the commercial real estate (CRE) market, while others have a broader focus on the

entire real estate market (Addium and Echholtz 2023, 2). They also constructed a model in which

they focus on the pricing of flood risk, comparing the prices of the real estate assets before and

after Hurricane Sandy, instead of just focusing on the housing markets (Addium and Echholtz 4,

10), which informed the creation of our model. This study concludes that areas that have a higher

flood risk in the event of natural disasters, such as hurricanes, are likely to be associated with

higher capitalization rates, and capitalization rates can increase due to a higher risk premium

(Addium and Echholtz 2023, 14). Higher investment risk premiums are also a factor in insurance

premiums, so we can conclude from this study that CRE markets more likely to be affected by

natural disasters could have higher insurance premiums, which we will test in the model below.

Model and Data

The empirical model that we will be testing is given as

LnPremium s m=B0 + B1 IncuredLos s m +B 2 NaturalDisaste r m +e i

In this linear regression model, LnPremium s m represents the log of the premiums earned

against our explanatory variables in each of the specific markets m. IncuredLos smrepresents the

incurred commercial insurance losses by state, and NaturalDisaste r mrepresents the annual

number of natural catastrophic events in that state, as in the and e i represents the error term in

which other factors could affect the insurance premiums. This model is based on the model

stated in equation 2 in Born and Viscusi et al. (2006) and will allow us to analyze how natural

disaster risk affects insurance premiums in our chosen markets. Specifically, we determined from
Kunreuther and Michel-Kerjan’s research that the Florida CRE market will provide us with the

most comprehensive data, as we can compare the insurance premiums from different regions in

the state, including the most hurricane-prone southern region, the Atlantic coast, and the gulf

coast. We will run this model with the most current yearly data available, looking at the average

premiums for as many houses as possible. We will also run our model using the control city of

Chicago, so that we are able to compare the results in more hurricane prone areas with a city that

is not hurricane prone. Additionally, as we continue our research, we could include further

explanatory variables relevant to refine the model.

The data for this model will be drawn from a variety of sources. The data for the

insurance premiums will come from the National Association of Insurance Commissioners, as

used in Born and Viscusi et al. (59), except we will be requesting more current data. In terms of

analyzing the effects of natural disaster in our target market of Florida, we will average insurance

premiums for each city in our region, to create regional averages instead of the average for the

state, to allow for regional dipartites. The data for the incurred losses will be taken from the

Insurance Information Institute’s incurred losses by city dataset, in which we will again average

the incurred losses for each city in our regions in Florida, allowing us to factor in regional losses

on insurance premiums. Finally, for the data for annual natural disasters by state, we will use the

National Centers for Environmental Information’s Billion-Dollar Weather and Climate Disasters

dataset filtered by our specific markets. However, if we were doing further research, we would

request additional data for annual natural disaster by city from the National Centers for

Environmental Information to address regional dipartites in natural disaster effects, as that data is

not currently available to the public. Overall, we believe that this model will allow us to measure
the impact of natural disasters on insurance premiums in our coastal markets, as it accounts for

multiple explanatory variables.

References

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