Climate events can lead to higher insurance rates

Record high and low temperatures. Flooding. Droughts. Wildfires. Hurricanes. Changing weather patterns. The signs of climate change are all around us.

These severe weather events bring with them business interruptions and damage to properties that lead to more insurance claims—which causes premiums to go up.

“We are seeing lots of events these last several years, some in areas you might not have seen them happen in the past or to such extremes,” said Jackie Collins, senior director/VP, real estate and hospitality services, Gallagher.

Jackie Collins, Gallagher

She said that while events that require insurance claims naturally happen, there is usually an ebb and flow, but now more of them are occurring. “You’ll go years without having them and then they’ll pop back up—and we are seeing them at the same time,” noted Collins. “You have big freeze claims in Texas, where you are not used to having large freeze losses.”

Due to the abundance of events, insurers are paying more money out to their clients in claims. “That is very much affecting the insurance industry because carriers can’t model for the losses to know how much premium to charge,” she said. “The effect of that is what we saw in 2023, where you have reinsurers [who provide insurance to insurance companies]that are upside down and have not collected enough premium.”

To make up for the money they have paid out on claims in recent years, insurers and reinsurers have had to raise rates—in many cases, extremely. While it was not one of her clients, Collins has seen increases of up to 700% in premiums.

These extreme events have also led the reinsurance companies to not only raise their rates, but to not offer coverage in areas that are prone to certain types of weather events, like flooding, wildfires or hurricanes.

With the reinsurance companies not offering coverage for these events, the insurance companies would not cover them for their clients. “Carriers were saying, ‘We can’t do this type of coverage anymore because we can’t get reinsured,’” said Collins. “We’ are taking the exposure 100% by ourselves. A lot of carriers did just pull out of those areas and not offer insurance.”

Investors in insurance companies also decided to pull their money from these companies and invest in other areas, especially given higher interest rates. “They could invest in something more stable and make more money than investing in the insurance market, where they have been losing,” she said.

Given these rising prices and smaller numbers of providers available in certain areas, what are hoteliers—who can’t take the risks on themselves—to do?

Collins said that some of her clients have been looking at alternative insurance products where the clients take on more of the risk.

The company is also working with its hotel clients to “clean up” their underwriting data—the factors used to determine the cost of insurance. “That is a really big deal,” she said. “Underwriters don’t know your property, so when they see it, they’re just seeing a piece of paper and it’s a box to them. They just see how it is valued. They have very limited information to describe that building.”

The more information a client can give to describe the asset, the better off they will be. “You are securing the underwriter’s confidence in your data, which allows them to feel that they are pricing your properties correctly,” said Collins.

She noted that a big issue has been that valuations were actually far off from the true value of properties. “If a schedule was valued at $100 million, the insurance company would price for that,” she said. “Later, they would find out it was really a $300-million schedule. They would blow through their limits.”

She added, “The insurance companies want to know how you come to the values you have. A lot of them ask to have third-party companies do appraisals. That is not something that companies have done often.”

Underwriters are also looking for certain things when they are evaluating properties, including water-detection systems. “There are so many water damage issues at hotels, and carriers are starting to put very large deductibles—we’re seeing them up to $250,000,” said Collins. “If you have a water-damage event, meaning the sprinkler system bursts or someone hung a dress on a sprinkler head, the water-detection system can help get the water turned off before any major damage occurs.”

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