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Dramatically rising insurance costs have hit owners, operators, and developers of rental housing hard in recent years. And in an environment of slower rent growth and rising interest rates, these costs have become increasingly tough for many rental housing providers to shoulder.

As a result, many firms are in the difficult position of choosing whether to eat the higher costs, knowing it means less reinvestment in other areas of their businesses or higher rents for residents, or find ways to scale back policies to mitigate the costs, raising their risk exposure.

Continued uncertainty around costs and greater risk burdens creates negative repercussions for multifamily investment and development at a time when more housing is needed to meet an array of growing demand. Government policies intended to tackle the nation’s housing shortage and address affordability challenges need to account for the structural problems in today’s insurance markets.

New Survey Outlines State of Play

In response to the worsening situation, the National Multifamily Housing Council (NMHC) recently released its 2023 State of Multifamily Risk Survey and Report, a critical update to a 2021 research report on rising insurance costs. This year’s survey report features responses from roughly 160 multifamily firms and provides both an important benchmark for the industry’s insurance challenges and insights into firms’ risk mitigation strategies.

While insurance costs have been rising for years, the jumps have been significantly more pronounced in recent years. Property insurance costs have risen a staggering 26% on average for respondents over the past year alone, according to our research. And some firms report even higher spikes in property premiums and significant challenges across all other lines of coverage like liability, cyber, builders risk, and more.

At the same time insurance providers are renewing policies at higher costs, many also are scaling back policies. In the past three years, more than half of respondents (57%) indicated that their insurance carriers included new policy limitations, while roughly one-third (34%) reported that their insurance carriers limited or reduced coverage amounts. In some cases, these changes mean some firms are effectively paying more for less coverage.

Source: 2023 State of Multifamily Risk Survey and Report, NMHC

Higher replacement costs, a lack of reliable data, and a crush of severe weather events are some of the factors contributing to the surge in insurance costs. As the risk landscape has gotten more complicated for insurance providers, many have exited the market, leaving a vacuum of viable or affordable private insurance options.

Multifamily Firms Respond to Challenges

The fallout is being felt broadly across the market, affecting market-rate, affordable, student, and seniors rental housing providers rather evenly. Multifamily firms writ large are struggling to figure out how best to mitigate the costs without raising their risk exposure too much. Nearly two-thirds (61%) of respondents said that meant increasing their deductibles to maintain affordability.

Source: 2023 State of Multifamily Risk Survey and Report, NMHC

It’s difficult to see these trends reversing anytime soon, particularly as our climate crisis accelerates. Storms, floods, droughts, and other extreme climate events have increased casualty risks greatly. According to survey respondents, in the past three years, their largest loss categories were (in descending order): fire; freezing; water and flooding; and windstorm/hurricane.

To be proactive in meeting these challenges, many multifamily firms are investing in better data quality and risk modeling software. However, survey results showed that 58% of respondents reported not having such a system in place internally. Firms also are paying greater attention to third-party insurance compliance and setting stricter requirements for renter’s insurance.

Challenges Highlight Policy Implications

This volatility around pricing and general uncertainty in the insurance market is affecting property valuations and giving capital providers and institutional investors some cause for pause. Many are revisiting insurance requirements to more appropriately assess climate risk so healthy investment can continue in markets where people want to live.

The expanding demand for more affordable and attainable housing underscores the need for continued multifamily investment and policies that can add stability to the insurance market. We continue to push lawmakers to incentivize a more robust insurance and reinsurance market for multifamily housing so that reasonably priced lines of coverage remain available to meet property needs and mitigate risk.

One important place for policymakers to start is with the National Flood Insurance Program. The program needs some critical reforms as well as a long-term reauthorization to ensure multifamily firms have access to programs that can help mitigate flood risk at their communities.