The commercial real estate sector is increasingly feeling the impacts of climate change as more billion-dollar natural disasters occur each year and more municipalities across the country enact aggressive building performance standards. As natural disasters intensify, insurance companies are experiencing heightened pressure from larger and more frequent settlements, resulting in surging insurance premiums. This trend has depressed net operating income and property valuations in regions with elevated climate physical risks (i.e., susceptibility to natural disasters), prompting some investors to reevaluate their participation in these high-risk markets.

A Persistent Trend
In Q4 2023, the Council of Insurance Agents and Brokers (CIAB) reported (25) consecutive quarters of nationwide commercial property premium increases. The average annual growth rate of commercial property premiums from 2017 to 2023 was between 7 and 8% (see Figure 1). However, in Q1 2023, premiums increased by 20.4%, the first time breaching 20% since 2001.

Figure 1. Premium Change for Commercial Property (Q1 2017-Q4 2023)
CIAB. Commercial Property Casualty Mark Index Q4/2023

Insurance Premium Graph

Historically, underwriters relied on past events to establish insurance premiums. However, with more unpredictable and intense weather events and natural disasters, it is becoming increasingly difficult to underwrite the financial risk associated with climate change. As we welcomed 2024, most news outlets reported on the dramatic rise in global temperatures in 2023, significantly outpacing projections from the best climate models. Meanwhile, insurance companies continue to reevaluate their exposure in states that are exceptionally vulnerable to climate change impacts, including California, Florida, Louisiana, and western states affected by wildfires.

Variability of Climate Risk Models
Many organizations are evaluating physical climate risk through proprietary risk models, like Munich RE.  Despite using similar open-source climate data, these models often arrive at wildly different conclusions. A 2022 report developed by LaSalle Investments and ULI highlighted this discrepancy as seen in Figure 2 below. As risk modules mature and new standards emerge, like ASTM’s Property Resilience Assessment, we anticipate the market will move towards greater consensus in evaluating physical risks.

Figure 2: Variations across Insurance Providers among Overall Physical Risk
ULI/LaSalle. How to Choose, Use, and Better Understand Climate-Risk Analytics

Climate Risk Model Comparison Table

Hardening of Assets
CRE organizations are mitigating physical climate risk by climate-proofing existing assets and integrating resiliency measures into the design of new buildings. These capital-intensive measures include the use of fire and wind-resistant glazing and cladding materials, elevating critical infrastructure, installing flood walls, and investing in energy and water efficiency measures. Alternatively, the high cost of hardening assets and rising insurance premiums have prompted some companies to begin reevaluating their participation in high-risk markets.

Overexposed to Climate Risk
In March 2023, Eric Andersen, President of Aon (2nd largest insurance broker globally), told a U.S. Senate committee that climate change has created “a crisis of confidence around the ability to predict loss. . . . Just as the U.S. economy was overexposed to mortgage risk in 2008, the economy today is overexposed to climate risk.” The bottom line. . . . Climate change impacts are being realized far earlier than anticipated, which is destabilizing the insurance industry and injecting uncertainty into CRE markets. Moving forward, the continual assessment of climate risk and adaptation strategies will be critical for minimizing asset exposure and navigating the evolving insurance landscape.

Beth Yetter

By Beth Yetter- Project Manager- breea


About breea
We are breea, a boutique ESG advisory company that advises sophisticated real estate portfolios on corporate responsibility and the transition to a lower carbon future. We take great pride in the expertise, responsiveness, and dependable service we provide our clients.