- Key Drivers of Rising Costs: Location risks (e.g., natural disasters), claims history, building age, and construction materials heavily influence premiums. Properties in high-risk states like Florida and Texas saw increases of 37%–43% per unit.
- Premium Calculation: Insurers use property value and risk factors to calculate costs. Common methods include Replacement Cost Value (RCV), Actual Cash Value (ACV), and per-unit pricing. Multifamily insurance typically costs $1,000–$3,000 per $1M of coverage.
- Market Trends: Climate change and natural disasters are driving premiums higher, with deductibles rising by 23%–412% in some cases. Urban crime rates and regulatory changes also impact costs.
- Cost-Saving Strategies: Enhance safety measures (e.g., fire alarms, sprinklers), avoid frequent claims, shop for competitive quotes, and consider higher deductibles while maintaining reserves.
Quick Comparison of Insurance Cost Factors
| Factor | Impact on Premiums | Example/Trend |
|---|---|---|
| Location Risks | Higher in disaster-prone areas | Florida: +37%, Texas: +43% per unit |
| Claims History | Frequent claims = higher renewals | Avoid claims under $100,000 to maintain records |
| Building Age | Older buildings = higher costs | 40+ years old = significantly higher premiums |
| Construction Type | Fire-resistant materials = lower costs | Wood frame = higher, concrete = lowest |
| Coverage & Deductibles | Higher coverage = higher premiums, higher deductibles = lower premiums | Deductibles rose up to 412% since 2021 |
Understanding these factors and taking proactive steps can help property owners balance protection with affordability. Read on for detailed insights and actionable tips.
The Lone Star Capital Podcast E63: Managing Rising Multifamily Insurance Costs with Rogers Gray
Main Factors That Determine Insurance Costs
When it comes to setting insurance premiums, insurers look at several critical factors - like location, claims history, building specifics, and coverage details. Understanding these elements can help property owners make informed decisions to better manage their costs. Let’s break down how each factor impacts what you pay.
Property Location and Area Risks
Where a property is located plays a huge role in determining its insurance costs. Properties in areas prone to natural disasters - hurricanes, wildfires, hailstorms - typically face higher premiums due to the increased likelihood of claims. For instance, in the 10 states with the highest annual loss totals, premiums jumped 31% in a single year and soared 108% over five years. In contrast, properties in lower-risk states saw smaller increases of 25% and 96%, respectively [5].
Recent data highlights these trends. In Fort Lauderdale, where hurricanes are a major concern, monthly premiums reached $123 per unit as of January 2024 - a staggering 53% increase from the previous year. RealPage data even reported higher costs of $147 per unit per month [6]. Similarly, Houston properties, impacted by hailstorms and freezes, saw premiums climb to nearly $105 per unit monthly - up 41% in just one year [6]. Los Angeles properties weren’t spared either, with wildfire risks driving up premiums by 30%, costing $83 to $97 per unit monthly [6].
Adding to these challenges, climate events causing at least $1 billion in damages have become more frequent, averaging 20 per year since 2019 compared to 13 per year in the previous decade [6].
Distance from emergency services also matters. Properties farther from fire departments, hospitals, or police stations often face higher premiums due to slower response times during emergencies.
Past Insurance Claims
A property’s claims history can affect its premiums for years - up to five, to be exact. Frequent claims signal higher risk, leading to higher renewal premiums.
"Claims filed at a property affect the premiums for the next renewal - potentially for the next five years", says Marc Gordon, principal, co-president, and CFO at Investors Management Group (IMG) [7].
To keep premiums in check, IMG avoids filing claims under $100,000, even though their policy allows for $25,000 deductibles [7]. This cautious approach helps maintain a clean claims record.
Property owners can also reduce risks by paying for minor repairs out-of-pocket instead of filing small claims. Water damage alone accounts for about 45% of multifamily claims, with fire and storm damage making up most of the rest [2].
Building Age and Construction Materials
The age and construction materials of a building significantly affect insurance costs. Older properties - especially those over 30 years old - tend to have higher premiums, with rates climbing even more for buildings over 50 years [8]. Why? Older systems like plumbing, electrical, and HVAC are more likely to fail, leading to claims.
Construction materials also make a difference. Here’s how materials impact premiums based on fire resistance:
| Construction Type | Fire Resistance | Premium Impact |
|---|---|---|
| Wood Frame (Type V) | Low | Higher |
| Masonry (Type IV) | Moderate | Moderate |
| Steel Frame (Type II) | High | Lower |
| Reinforced Concrete (Type I) | Highest | Lowest |
Wood-frame buildings face the highest premiums due to their fire risk, while reinforced concrete and steel frames benefit from lower rates thanks to their durability. Interestingly, a well-maintained 40-year-old building may pose fewer risks than a poorly maintained 20-year-old one [8].
Coverage Limits and Deductible Amounts
The amount and type of coverage you choose directly influence premiums. Higher coverage limits mean higher costs, while opting for higher deductibles can lower monthly premiums. However, this trade-off requires careful planning since higher deductibles increase out-of-pocket costs when claims arise.
Many property owners are now choosing higher deductibles to offset rising premiums, which means they need to maintain sufficient reserves for unexpected claims. Additional coverage - like flood insurance, earthquake protection, or terrorism coverage - can also drive up costs, especially as some of these options become mandatory in certain areas.
The current insurance market adds another layer of complexity. Some insurers are pulling out of high-risk areas altogether, reducing competition and further driving up premiums [4]. Adjusting coverage limits and deductibles, combined with improving the physical condition of properties, can help owners manage these escalating costs effectively.
How Insurers Calculate Premium Costs
When it comes to determining premiums for multifamily property insurance, insurers follow a structured process. This involves evaluating property value, assessing risks, and considering coverage options. The result? A calculated premium that reflects the property's overall risk profile and coverage needs.
Premium Calculation Process
At its core, premium calculation starts with a simple formula: multiplying the property's value by a risk factor. For commercial properties, this means taking the building's valuation - along with its contents - and applying a risk-based multiplier. Higher-risk properties naturally have steeper premiums, while lower-risk properties enjoy reduced rates [9].
Insurers rely on three primary methods to evaluate a property's value, which directly impacts the premium amount:
- Replacement Cost Value (RCV): This method estimates the cost of rebuilding the property using similar materials and quality. While RCV tends to result in higher premiums, it provides more comprehensive coverage if the property suffers a total loss [3].
- Actual Cash Value (ACV): Here, depreciation is factored into the equation. While this might lower premiums, it also reduces the payout amount in the event of a claim. For older properties, this can mean significantly less compensation [3].
- Per Unit or Per Door Costs: This approach calculates premiums based on the number of units or doors in the property. It simplifies budgeting and makes it easier to compare costs across different properties [3].
To give you an idea of costs, multifamily insurance typically ranges from $1,000 to $3,000 per million dollars of coverage [3]. On a per-unit basis, annual premiums generally fall between $150 and $650, depending on various risk factors [3].
When applying these valuation methods, insurers also consider a host of other factors, such as the building's construction materials, condition, and specific location hazards. For instance, proximity to fire hydrants or stations can lower costs, while risks like natural disasters, flood zones, or high crime rates can push premiums higher [9]. These elements combine to create a detailed risk profile for the property.
How Multiple Risk Factors Affect Pricing
After establishing a baseline premium, insurers fine-tune the calculation by analyzing how various risk factors interact. This comprehensive evaluation considers the property's age, construction type, and location. For example, an older wood-frame building located in a hurricane-prone area will likely face much higher premiums than a similar building in a safer inland location. Additionally, a property with a history of claims in a high-crime area may see its rates climb even further.
Recent trends highlight the impact of these factors. Multifamily insurance premiums surged by 45% between 2023 and 2024, with rates in 2024 now double those seen in 2021. During the same period, deductibles rose significantly - by 23%, 27%, and even 412% in some cases [1].
Geography plays a key role, too. States like Florida and Texas have experienced sharp increases in average insurance costs, with per-unit rates rising 37% and 43%, respectively, due to climate-related risks [3]. In disaster-prone areas like East Houston and Fort Lauderdale, premiums can be more than double what they are in safer regions [6].
Crime rates also influence premiums, particularly in urban areas [10]. However, property owners can take steps to reduce costs. Installing safety measures like alarm systems or fire sprinklers can help. Properties equipped with advanced technology - such as smart sensors and automated monitoring systems - often qualify for discounts of 5–15% [2].
Insurers don’t view properties as a simple list of isolated factors. Instead, they assess the property as a whole. For instance, a well-maintained older building with modern safety features in a moderate-risk area could cost less to insure than a poorly maintained newer building in a high-risk location. This holistic perspective means that strategic upgrades to your property can significantly impact your insurance costs.
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Top Insurance Companies for Apartment Buildings
Selecting the right insurance provider is essential for smooth claims handling and cost-effective coverage. The insurance market offers a variety of carriers, each with its own strengths, catering to the diverse needs of property owners.
Leading Insurance Providers and Services
When it comes to multifamily insurance, some major national carriers dominate the market with standout offerings. Here’s a closer look at these top players:
- State Farm: With an 18.21% market share in 2024, State Farm is a leader in the industry. Backed by an A++ AM Best rating and a J.D. Power score of 873, they provide comprehensive coverage for property damage, liability, and loss of rental income. Optional add-ons allow for even greater protection [13][11].
- Allstate: Holding 8.97% of the market in 2024, Allstate offers extensive coverage options and policyholder discounts. The company boasts an A+ Financial Strength Rating from AM Best and a J.D. Power score of 868 [13].
- Liberty Mutual: With a 6.14% market share in 2024, Liberty Mutual provides highly customizable policies. Options include replacement cost coverage, personal property protection, rental value coverage, inflation protection, and umbrella policies. Their financial ratings are solid, including an A2 from Moody’s, an A from AM Best, and an A from S&P [13]. Liberty Mutual has also been accredited by the Better Business Bureau since 1931.
- Farmers: Farmers holds a 5.51% market share as of 2023 and simplifies insurance management with single-policy coverage for multiple units. Discounts are available for safety installations, and the company maintains an A rating from AM Best, along with a J.D. Power score of 883 [13].
- Travelers: Specializing in landlord insurance for one to four rental units, Travelers offers coverage for property damage, liability, and loss of income. With an A++ AM Best rating, they are a reliable choice for smaller-scale landlords [12].
- USAA: Tailored for military families, USAA provides exclusive coverage for members and their qualifying family members who own rental properties. They offer various discounts for insuring multiple properties and installing security systems, all supported by an A++ AM Best rating [12].
Insurance Company Comparison
Understanding the types of insurance carriers available can help property owners make informed decisions based on their needs and budgets. Here’s a breakdown of carrier types by key factors:
| Carrier Type | Financial Strength | Coverage Options | Service Level | Pricing |
|---|---|---|---|---|
| National Multiline | A+ ratings | Broad and Comprehensive | Standardized | Competitive |
| Specialty MGAs | A to A+ ratings | Highly Customized | Personalized | Premium |
| Direct Writers | A+ ratings | Limited Options | Self-Service | Discounted |
| Regional Mutuals | A to A+ ratings | Flexible | Local Focus | Variable |
- National Multiline Insurers: Carriers like State Farm, Allstate, and Liberty Mutual offer broad coverage options, competitive pricing, and standardized service levels.
- Specialty Managing General Agents (MGAs): These providers deliver tailored coverage and personalized service, often at a higher cost.
- Direct Writers: Focused on affordability, direct writers offer limited coverage options and self-service models.
- Regional Mutuals: These carriers provide flexible policies with a strong local presence, making them ideal for region-specific needs.
When evaluating insurers, it’s important to consider more than just premium costs. Look at financial stability ratings, customer reviews, available discounts, and the flexibility of policy options. Additionally, assess your building’s size, location, and potential risks to ensure your property is adequately protected.
Striking the right balance between coverage, cost, and service is key to safeguarding your investment while meeting the unique demands of your property portfolio.
U.S. Regulations and Market Factors
The multifamily insurance market in the United States operates under a mix of federal, state, and local regulations. These rules, combined with shifting market dynamics, play a major role in determining insurance premiums, which can vary widely depending on the region and property type.
Building Codes and Legal Requirements
Building codes and safety regulations significantly influence how insurers assess the risk of multifamily properties. Properties that fail to meet updated standards are often hit with much higher premiums. DeeDee George, vice president of Asset Management & Compliance at Wesley Housing, highlights this issue:
"Evolving building codes and safety regulations can require costly upgrades, which factor into insurance costs. Properties that don't meet current standards are often subject to higher premiums." [14]
State-specific rules also create stark differences in insurance costs across the U.S. For instance, Florida and California, both prone to natural disasters, enforce stricter building codes. This has driven up insurance rates, especially in Florida, where property insurance costs jumped 33.7% in 2022, reaching a median of $1,069 per unit. This spike is largely due to the state enduring eight hurricanes over the past five years [14].
Geography plays a huge role as well. Coastal properties face premiums that are typically 15% to 25% higher than inland properties because of hurricane and flood risks [2]. This "coastal penalty" reflects the higher likelihood of severe weather events and the expensive repairs that follow.
Staying compliant with shifting regulations is critical for property owners. Failing to do so can lead to penalties and even coverage gaps, which are costly. On average, an uninsured apartment building faces losses of $350,000 per incident [2]. Regular safety audits and staff training in legal requirements are essential for maintaining compliance and potentially lowering premiums.
Adding advanced safety technology can also help. Features like smart sensors, automated monitoring systems, and enhanced security measures show insurers that a property poses less risk, which can lead to discounts [2]. However, while these measures can help reduce costs, they also underscore the broader market volatility tied to regulatory changes.
Current Market Conditions and New Risks
From 2023 to 2024, multifamily insurance premiums skyrocketed by 45% [1]. By 2024, premiums had doubled compared to 2021 levels [1], putting immense financial strain on property owners. Building code updates and regulatory pressures are just part of the story - market risks are compounding the problem.
Climate change has become the leading driver of rising insurance costs. In 2024, the U.S. experienced 27 major climate-related disasters, totaling $182.7 billion in damages [15][16]. These events have forced insurers to reevaluate risk, pushing commercial real estate premiums up by 88% over the past five years [16].
One multifamily property owner shared the financial impact:
"We estimate that over 50 percent of our overall operating expense inflation since 2020 can be explained by property insurance premium increases. Property insurance increased from 6 percent of our total operating expenses in 2020 to a forecasted 14 percent in 2024." [1]
Before the pandemic, average multifamily insurance costs were around $30 per unit per month. By November 2023, that figure had risen to $65 per unit per month - a staggering 119% increase over four years [10].
Adding to the burden, deductibles have risen even faster than premiums since 2022. About 61% of multifamily property owners report higher deductibles, while insurers are also narrowing coverage by excluding more causes of damage [17]. This leaves property owners shouldering more of the financial risk.
Urban development and social factors have introduced new challenges. For instance, some insurers view cities like Minneapolis and St. Paul as higher-risk due to property damage and perceived crime spikes during the 2020 civil unrest [1]. These events show how social and political factors can influence insurance costs long after the fact.
Secondary perils - like severe storms, floods, and wildfires - are now the leading causes of insured losses [15]. The trend of concentrated, high-severity weather events has caught both property owners and insurers off guard, resulting in sudden surges in claims.
To manage these challenges, property owners are taking steps like seeking multiple insurance bids, avoiding small claims, cutting operating costs, and raising rents [1]. However, affordable housing providers face unique hurdles, as rent restrictions and limited insurance options make it harder to adapt.
Jaime del Álamo, Head of ESG Value & Risk Americas at JLL, sums up the situation:
"Rising insurance costs are becoming a significant challenge for real estate owners, especially in markets facing direct climate hazards. Insurers traditionally accounted for a 2-3% annual increase in expenses, but premiums are rising much faster, driven by the escalating financial toll of climate events." [16]
Key Points for Property Owners and Managers
With insurance expenses nearly doubling over the past five years [24], understanding how premiums are calculated can help property owners and managers take control of rising costs. Here are some practical strategies to manage those expenses effectively:
- Enhance Security Measures: Installing features like cameras, access control systems, fire alarms, sprinklers, and smart sensors can lead to discounts of up to 10%, with additional savings of 5–15% possible [18][2].
- Conduct Annual Inspections: Regular inspections, timely repairs, and keeping detailed records not only prevent claims but also strengthen your position during negotiations with insurers [18][22].
- Screen Tenants Carefully: Using background checks and reviewing rental histories can reduce risks. For example, properties rented to young professionals often present fewer risks compared to student housing [18].
- Shop Around and Bundle Policies: Comparing quotes regularly, bundling policies, and maintaining long-term relationships with insurers can help offset the impact of premium increases, which have risen as much as 120% [19][21][4].
- Handle Deductibles Wisely: While 61% of property owners have increased their deductibles - some by as much as 700% since 2021 [4][1] - it’s crucial to ensure you’re financially prepared to cover those deductibles in case of a claim.
- Invest in Eco-Friendly Upgrades: Certifications like LEED or Energy Star signal reduced risk to insurers and may result in cost savings [19].
- Choose Noncombustible Materials: Opting for noncombustible construction materials can reduce insurance costs by as much as five times compared to wood-frame buildings [20].
- Be Strategic About Filing Claims: Filing too many claims can lead to higher premiums. Document each claim thoroughly and avoid a pattern of frequent claims that could flag your property as high-risk [23][1].
"Most of [the] portfolios like ours are just one claim away from significant financial stress" [1].
- Keep Financial and Property Records Organized: Strong financial practices, along with clear documentation of property details, improvements, and any losses, can help you negotiate better rates with insurers [21][22].
Although the insurance market for multifamily properties remains tough, a proactive approach that includes risk management, routine maintenance, and strategic planning can help property owners keep costs under control while ensuring their assets are well-protected.
FAQs
How do climate change and natural disasters affect insurance premiums for multifamily properties?
Climate change and natural disasters are driving up insurance premiums for multifamily properties across the U.S. Regions vulnerable to hurricanes, wildfires, and flooding often bear the brunt of these increases, as insurers adjust rates to account for heightened risks. In fact, areas frequently hit by natural disasters tend to see premiums climb at a pace far exceeding inflation.
Long-term climate impacts, like structural damage from prolonged droughts or extreme heat, also play a role in rising costs. Insurers incorporate these risks to safeguard against potential losses, which steadily pushes premiums higher. This growing financial exposure to climate-related events directly affects the affordability of insurance coverage, making it an increasing challenge for property owners to manage.
How can property owners manage rising insurance costs while maintaining proper coverage?
Property owners facing rising insurance costs can take charge by implementing smart risk management strategies. For instance, improving building safety features - like adding fire suppression systems or upgrading security - can help reduce risks, which might lead to lower premiums. Regular property maintenance and careful tenant screening are also key to minimizing liability risks.
Working with experienced insurance brokers is another smart move. They can help you find policies that balance cost and coverage, tailored specifically to your property’s needs. You might also consider raising your deductibles or investing in upgrades that make your property more resistant to natural disasters. These steps not only help manage premiums but also ensure your investment stays well-protected.
How do a building's materials and age impact insurance premiums for multifamily properties, and what steps can owners take to reduce costs?
The materials used in a building and its age are key factors that influence insurance premiums for multifamily properties. Older buildings often face higher premiums because they might contain outdated materials that are more susceptible to fire, hail, or severe weather damage. On top of that, aging infrastructure can lead to a greater risk of expensive repairs or insurance claims.
One way property owners can work toward lowering these costs is by replacing or upgrading older materials with modern, more durable alternatives. For example, choosing materials that are resistant to fire or extreme weather can help reduce potential risks. Renovations aimed at improving safety and structural integrity - like installing fire-resistant roofing or updating outdated electrical systems - can also make a noticeable difference in insurance rates. These upgrades not only safeguard your property but can also result in significant long-term savings on insurance expenses.
