By Derek Kartchner | Gila Insurance
For most investors, insurance is an enigma. The reason behind the rates, what’s covered and what’s not, doesn’t make much sense. In the last year, one of the most common insurance questions I get is: “What in the world is going on with insurance?” Because an already difficult subject has gone crazy. Well, it’s a hard market. What does that mean? It means it’s currently the insurance equivalent of the 2008 real estate meltdown. Companies are losing money and getting downgraded; it’s a mess. It’s known in the insurance world as a hard market. What is a hard market, and what does it mean? A hard market is defined as a period with high premiums and limited coverage options. Why? Because there are only two levers that insurance companies can use to right the ship, so to speak: rates and underwriting.
- Insurance Rates are the first lever. In a hard market, they skyrocket faster than your blood pressure during a tax audit. Suddenly, your once-affordable premiums are ballooning. It’s as if the insurance companies have decided to upgrade your ticket price from economy class to first class while making you ride in the cargo hold. Higher rates mean increased costs to insure your properties, which translates to less money in your pocket. Your dreams of becoming the next real estate mogul? Well, they’re now competing with your insurance premiums for survival. Is this real? Yes! In the last couple of years, we have seen mortgage brokers go from defaulting insurance at a rate of $600/year to $1200 per year. Double, because that is what they are experiencing, not just with your company, but with EVERY company in the market. In a recent article, I saw that insurance rates in Arizona had increased 50% year over year. Yes, it’s ugly. Well, I will just switch and get lower premiums. In the words of ESPN’s Lee Corso, “Not so fast, my friend!”
- Why? Well, onto the other lever, underwriting, the insurance equivalent of a super-picky roommate. In a hard market, underwriting gets stricter than a bouncer at a VIP club. Gone are the days of easy approvals. Now, insurers are scrutinizing your properties like they’re auditioning for a reality TV show. They want detailed inspections, endless documentation, and assurances that your property isn’t prone to spontaneous combustion or alien invasions. Think I am joking? Areas in Tucson, San Tan, Scottsdale, Glendale, and more are currently classified as uninsurable due to wildfire risk. REALLY, wildfire? Yes. If your properties are in a disaster-prone area or have that charming “vintage” infrastructure (i.e., old plumbing, wiring, roof, or HVAC), good luck! You might end up with coverage exclusions that expose you more than a streaker at a football game. Think I am joking? Check your policy; you will likely see higher deductibles, lower coverage for water damage, or roof limitations you didn’t have just a year or so ago, and you probably didn’t pay attention to the change as it was announced with your insurance renewal. It’s like buying a luxury car, only to find out the dealership decided to repo the tires a year into your lease.
How long will this last? Who knows? It was supposed to be Q2 2024. Now they are saying 2025. I say it will last as long as it takes the insurance companies to make money again. Why do I mention all this? Because it means if you have an older home or a home with some issues, you might be making some coverage concessions or paying more. So, next time you see those rates and underwriting hurdles, just remember: Laughter is the best medicine, and preparation and early action, your friend. Well, those and a good insurance broker.