Climate Change and Real Estate Insurance Requirements

This post is written by Trusted Partner, Park Insurance. To become a contributing editor, please contact our Real Estate Investor Solutions Specialist, David Maxwell at david@reincanada.com.

Climate change is no longer a distant concern—it’s a present reality affecting industries worldwide, including real estate. For property investors, understanding how climate change influences insurance requirements is crucial for protecting assets and ensuring long-term profitability. As extreme weather events become more frequent and severe, insurers are adapting their policies, and real estate owners must stay informed to mitigate risks effectively.

The Impact of Climate Change on Real Estate

Climate change manifests in various ways that directly affect real estate investments:

• Increased Frequency of Natural Disasters: Hurricanes, floods, wildfires, and storms are occurring more often, causing extensive property damage.
• Atmospheric Rivers: Intense rainstorms, like the recent atmospheric rivers in October, have led to severe flooding, particularly affecting properties in vulnerable areas.
• Temperature Extremes: Heatwaves and cold spells can strain building systems and infrastructure.
• Changing Weather Patterns: Unpredictable weather can lead to more frequent maintenance issues and affect property values.

These factors not only pose physical risks to properties but also influence insurance availability and costs.

Evolving Insurance Requirements

Insurance companies are reassessing their exposure to climate-related risks, leading to changes in coverage options and premiums:

• Higher Premiums and Deductibles: Properties in high-risk areas, such as flood zones or wildfire-prone regions, may face significantly higher insurance premiums. Insurers may also require higher deductibles for certain types of coverage, transferring more risk to property owners.
• Coverage Limitations and Exclusions: Standard policies may exclude coverage for certain climate-related events, like flooding or earthquakes, requiring separate policies. Insurers may also impose caps on the amount payable for climate-related claims.
• Stricter Underwriting Criteria: Insurers are conducting more thorough evaluations of properties before offering coverage. Requirements for protective measures, such as flood defenses or fire-resistant materials, may be imposed as conditions for coverage.
• Reduced Availability of Coverage: In some high-risk areas, insurers may decline to renew policies or withdraw coverage altogether. Fewer insurers may be willing to provide coverage, reducing competition and increasing costs.

Strategies for Real Estate Investors

To navigate these changes, investors should adopt proactive strategies:

• Conduct Comprehensive Risk Assessments: Evaluate how climate change may impact each property in your portfolio and employ tools and services that provide data on climate risks specific to your locations.
• Invest in Resilient Properties: Consider climate risks when acquiring new properties, favoring areas less prone to extreme weather events, and utilize building materials and designs that enhance resilience against climate-related damages.
• Implement Risk Mitigation Measures: Install flood defenses, create defensible space for fire prevention, and reinforce structures for storm preparedness.
• Review and Update Insurance Policies Regularly: Regularly consult with your insurance broker to stay informed on policy changes and ensure that your coverage limits reflect current property values and cover all relevant risks.
• Explore Specialized Insurance Products: Consider parametric insurance for quicker claims processing and environmental liability insurance to cover costs associated with pollution or environmental damage.
• Diversify Your Portfolio: Spread investments across different regions to mitigate localized climate events and consider property types less susceptible to climate risks.

The Role of Government and Regulations

Government policies are increasingly focusing on climate resilience and may affect insurance and real estate:

• Building Codes and Standards: Updated codes may require new construction to meet higher resilience standards, impacting construction costs.
• Zoning Laws: Changes may restrict development in high-risk areas or require additional permits.
• Incentives and Grants: Programs may be available to support investments in climate resilience measures.

Staying informed about regulatory changes can help investors anticipate and adapt to new requirements.

Working with Insurance Professionals

Collaborating with experienced insurance brokers who understand climate risks is essential:

• Customized Risk Assessments: Brokers can help identify specific risks and appropriate coverage solutions.
• Policy Optimization: They can negotiate terms and premiums, ensuring you have the most cost-effective coverage.
• Claims Support: In the event of a loss, brokers assist in navigating the claims process efficiently.

Working with knowledgeable brokers allows investors to secure tailored insurance solutions that align with their unique needs and effectively manage climate-related risks.

Climate change is reshaping the landscape of real estate investment and insurance. By understanding the evolving risks and insurance requirements, investors can take proactive steps to protect their assets. Implementing resilience measures, staying informed about regulatory changes, and working closely with insurance professionals are key strategies for navigating this new reality. Investing in climate resilience not only safeguards your properties but also contributes to the broader effort to mitigate the impacts of climate change.

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Chris Westrop is the Vice President of Commercial Lines at Park Insurance. With over 30 years of experience in the commercial insurance industry, he is a Chartered Insurance Professional with the Insurance Institute of Canada. As a REIN member and regular attendee at many of their programs, Chris brings valuable insights to real estate investors. Learn more about Chris and the experienced team of commercial insurance advisors at Park Insurance. Chris can be reached at (604) 659-3133 or cwestrop@park.ca.