As of mid-February, the historic LA fires have caused more than $250 billion in damage and economic loss* (not to mention the horrific loss of life and home) in an almost 4-week run of untamable fires. To put that into perspective, the fires rank as one of the worst in recent US history.

With the fires finally contained, it leaves displaced residents wondering what they’re going to do, and insurers, how they’re going to pay for the losses.

To the latter question, the answer is likely to be that we’ll all share the weight. More on that later on.

This all begs the question: how will the LA fires impact insurance premiums as a whole? 

With the increase in extreme weather events in the US over the last few years, the insurance industry has responded by increasing their premiums across the board. In fact, commercial buildings located in states with the 10 highest expected annual loss totals (according to FEMA), have seen a 108% increase in the past five years. Additionally, the Deloitte Center for Financial Services projects that the average monthly cost of insurance for a commercial building in the US (not just the top 10 states) could increase by a compound annual growth rate of 8.7% (2023 to 2030) – an almost 80% increase in just seven years.

While it might make some logical sense for insurance to only increase in the areas where these sorts of events more frequently occur, that’s not quite how insurance works. Generally speaking, rather than isolating its gains or losses to one particular area, insurance companies will aggregate them and spread them out across their entire territory. Sure, high-risk states like Florida will likely pay more in insurance than someone in Minnesota, but it usually won’t be proportional.

In the same study, Deloitte predicts that “by 2030, the cost premium of being in a higher-risk (read: extreme weather state) could be 24% greater than the national average, compared to a 32.5% discount in lower-risk states.”*

How this all pertains to real estate investing depends on where you stand in the equation. If you’re a buyer, you’ll have to factor in higher premiums into your underwriting, but so will everyone else, so that won’t necessarily impact your buying competitiveness. If you’re a seller on the other hand, you will likely have to adjust your price expectations to factor in that all buyers are going to have a higher expense ratio. If you’re already an owner/investor in a commercial property, your team of general partners will need to work to manage the expected expense increase and ideally offset it with an increase in revenue or decrease in other expenses – which is exactly what we’ve been doing at SPC.

Any way you slice it, insurance premiums are on the incline and we’re all going to see its effect in one way or another. The question is: are you and your investment team prepared to handle it?