How climate risks are impacting real estate insurance costs

Real estate is increasingly counting the cost of extreme weather events. As they grow in frequency and severity, the bill for repairing the damage and restoring business as usual is soaring.

In 2024 alone, 27 billion-dollar extreme weather events in the U.S. caused an estimated $182 billion of damage, according to NOAA data.

And even before storms, heatwaves or floods hit, building owners and occupiers now face higher insurance premiums.

In the U.S., for example, insurance is the fastest growing line item for building owners, with knock-on effects for operating incomes and longer-term asset values. In some high-risk coastal regions such as California and Florida, insurers have exited some local markets or limited their coverage following years of escalating losses. State-sponsored programs such as California’s FAIR plan are a last resort, but the Los Angeles wildfires have raised questions over whether they can cover huge damage bills.

“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,” says Jaime del Álamo, Head of ESG Value & Risk Americas, JLL.

Across the U.S., commercial real estate premiums have soared 88% over the last five years, according to JLL. By 2030, the average monthly cost to insure a commercial building could reach US$4,890, up from US$2,726 in 2023, Deloitte forecasts.

Other regions are equally struggling with the mounting costs of extreme weather.

Across the European Union, weather- and climate-related extremes are estimated to have caused €738 billion in economic losses to assets between 1980 and 2023, with over €162 billion between 2021 and 2023, according to the European Environment Agency.

In 2023, flooding in China led to over US$32 billion in economic losses, according to Aon, and is significantly pushing up residential insurance prices in Australia.

In response to the impact of extreme weather events, Italy passed a new law requiring climate insurance for all buildings from 1 January 2025.

"Climate risks have spurred regulatory changes to reduce the economic burden on local governments by addressing insurance coverage gaps and enforcing stricter building codes for enhancing resiliency,” says Wahib Ghazni, Senior Product Manager and Lead Financial Economist at Jupiter Intelligence.

From 2025, Paris will implement new ‘bioclimatic’ town planning regulations to create more resilient buildings. These include requirements around low carbon construction materials, renewable energy production on buildings over 1,000sqm, and nature and green space on roofs.

As climate risks mount, insurance policies are evolving. New policies are likely to come with higher deductibles, an increasingly variable expense for asset owners, according to an Urban Land Institute (ULI) and Heitman report.

Many insurers now require asset owners to implement resiliency measures to qualify for coverage or secure better rates. These physical measures – such as flood barriers, storm shutters, impact-resistant windows, upgraded roofing and drainage, and fire-resistant materials – can help mitigate risk from extreme weather events.

Longer-term risks, such as structural damage from prolonged drought and heatwaves, could also impact future insurance costs. “Insurers are grappling with how to approach chronic risks from extreme heat and shifting precipitation patterns. Resiliency measures can help insulate asset owners from these longer-term risks and manage future costs,” says John Thigpen, VP, Sustainability Services, JLL.

Adding alternative products like parametric insurance – which pays out pre-defined amounts triggered by specific disasters – can help investors manage expenses. Separate deductibles for different events can also help control costs, while more detailed risk assessments can factor in resiliency measures.

“Sophisticated climate risk assessments that evaluate exposure to acute and chronic physical hazards under multiple warming scenarios can support efforts by owners to align their insurance with their actual climate risk profile,” says Thigpen.

Advanced climate modelling is emerging as a key tool to manage insurance costs. These data-driven models predict potential climate hazards at an asset level and calculate the impact of various resiliency measures.

“Traditional catastrophe models train on historical data, but forward-looking models forecast use climate models using evolving non-stationary trends over time, improving accuracy in assessing asset risk and pricing insurance products,” says Ghazni.

“These models also provide a climate-adjusted value, incorporating future risks into asset valuations, which is becoming crucial for banks and investors.”

In California, new regulations allow insurers to use forward-looking catastrophe models instead of historical data to set premiums, underscoring the critical impact of future climate risk in underwriting.

The growing impact of climate risk insurance is also impacting asset strategy. Investment manager Wafra, for example, incorporates climate risk modelling in its underwriting, guiding where it invests and how resources are allocated to resilience measures.

“Banks are increasingly concerned by risks linked to climate and the associated insurance costs, whether due to non-compliance or because assets exceed risk thresholds. This is leading to more cautious lending practices, such as reduced loan-to-value ratios or even rejection of financing for high-risk properties, which will ultimately impact asset valuations,” says del Álamo.

For now, some locations are bearing the brunt of a changing climate more than others. But as extreme weather becomes more frequent and widespread, improving resilience will be essential for all buildings to manage growing climate risk, even in temperate climes.

Evolving green lease models are supporting greater collaboration between owners and occupiers to incorporate climate resilience into building development, design and operations. Canada’s REALPAC Office Green Lease model, for example, has included climate resiliency under a specific clause.

“Real estate owners and occupiers who understand the climate risk profile and magnitude of exposure for their portfolio and who proactively implement measures to mitigate those risks are best placed to manage future costs, protect the value of their assets, and reinforce the resiliency of their operations,” says Thigpen.