The Uninhabitable States of America

November 4, 2024

On October 17, 2024, German newspaper “Die Zeit” published an article titled “The Uninhabitable States of America,” which fundamentally questions the future insurability of risks in the U.S.

The article approaches the topic with anecdotal evidence and raises the question, “Are parts of the U.S. becoming uninhabitable?” It cites examples such as the relocation of an Inuit village in Alaska, the Isle of Jean Charles, which has been nearly destroyed by land erosion since 1950, ten homes falling into the ocean in North Carolina since 2020, and the impact of wildfires in Paradise, California on the insurability of U.S. properties.

It’s helpful to keep in mind that some examples may seem somewhat exaggerated. For instance, no one would likely consider uninsurability a continent-wide issue for Europe just because a handful of homes on Sylt might collapse due to shifting dunes.
For these types of incidents, it’s important to examine the specific causes closely:

Hurricanes and Storms

Hurricanes and tropical storms have been a constant presence in Florida and along the Gulf Coast states for centuries. While these events are not new, their impact has intensified over time.

The increase in insurance costs varies by market:

It is notable that percentage increases have been significantly higher in regions not predominantly impacted by storms (such as parts of Florida and other Gulf Coast states).

However, the absolute insurance payout figures in the storm-prone regions are, understandably, substantially higher.

Insurance Cost Increases

The rise in insurance premiums varies widely across different markets. Interestingly, percentage increases in areas not heavily impacted by storms (such as Florida and Gulf Coast states) are often higher than in storm-prone regions, though the absolute insurance payouts remain significantly higher in these high-risk areas.

Wildfires

The cause of wildfires in California is not primarily climate change. Instead, arson and neglected electrical infrastructure play significant roles in intensifying and spreading wildfires in the region.

Insurance Industry Reactions

Some insurers have partially withdrawn from certain states, or are planning to. This is currently the case in California and was temporarily so in Florida.

In Florida, reforms targeting insurance fraud have had a positive impact on premiums, particularly for apartment buildings.

For our own holdings, renewals at the end of 2024 are projected to be about 5% lower than last year, with new policies priced considerably lower than one to two years ago.

Impact on Real Estate Investments

On average, insurance costs account for about 8% of operating expenses for commercial real estate, including apartment complexes in the U.S. Increases in premiums can sometimes be offset by cost reductions in other areas.

Types of Insurance in the U.S.

For apartment complexes, insurance options differ from those typically found in Germany, including:

X-Wind – Covers all but wind, including fire, plumbing leaks, and sinkholes.
Wind Only – Covers wind-related damages, such as those from hurricanes, tornadoes, and tropical storms.
General Liability – Not mandatory but highly recommended, as tenants may file lawsuits for injuries occurring on the property.
Flood – Covers flood damages from rising ocean or inland waters and heavy rainfall.
Business Income – Covers income loss during claims processing.
Umbrella – Provides additional liability coverage beyond the limits of the general liability policy.

Trend Toward Increased Social Inequality?

The article suggests that individuals who can afford to build fire- and hurricane-resistant homes may remain in high-risk areas, while others lose their properties. The article mainly discusses single-family homes. Indeed, in Florida, a home from the 1960s situated just 2 meters above sea level faces high flood risk.

Properties like these, often with minimal structural value but a high land value due to waterfront locations, still hold substantial market value. For homes with mortgages, insurance is mandatory and often paid directly by the bank, ensuring the property remains covered.

While insurance can impose a hardship in some cases, these instances are not widespread enough to impact the market significantly.

In commercial real estate, such cases are rare. Although increased insurance costs can reduce profitability and property values, the impact is minimal due to insurance’s relatively small share of total operating expenses.

Due Diligence

Thorough risk assessment is essential when evaluating an investment, including flood zone considerations and the associated insurance costs. These factors are integral to property valuation and creditworthiness assessments.

Outlook and Proactive Measures

Given the changing climate and increased frequency of extreme weather events, investors and property owners are increasingly considering the longevity of their investments in affected regions.

Proactive measures to mitigate risks and secure properties are essential.

Urban Planning and Resilience Strategies

One promising approach to addressing these challenges is incorporating resilience strategies into urban planning. Cities like Miami and New Orleans are actively developing infrastructure improvements to better withstand threats from floods, hurricanes, and other natural disasters.

Key initiatives include:

Enhanced Flood Protection: Building and reinforcing levees and dams to protect residential areas.
Green Infrastructure: Adding parks, green spaces, and urban water retention systems to improve drainage and reduce flooding.
Building Code Adaptation: Stricter building codes for new constructions can ensure greater resilience against natural disasters, as seen in Florida since 1995.

Market Adaptation and Investor Perspective

Investors must remain aware of the shifting insurance landscape and its potential effects on their portfolios.

Rising premiums in high-risk areas may lead to investment shifts as investors become more cautious about such locations. Portfolio diversification and awareness of risks will be vital for informed decision-making in the future.