Your offer was just accepted on a beautiful property in Central Florida just a few miles from the coast. The income you will make from this short-term rental will fund your early retirement plans. Everything is humming along relatively smoothly—until you get your quote back for the insurance. Now, you feel like you just got punched in the gut.
The cost of the insurance will certainly take a chunk out of your profits, but after talking to an agent, you count yourself lucky because had you been located just a few miles south, you wouldn’t even be able to find a carrier to cover you.
What’s going on in Florida? What about California and Texas? If it seems like finding affordable insurance in some areas is getting harder and harder, your thoughts are correct.
Capacity is limited, and prices are going up. Many carriers are pulling out of markets entirely. But why?
What’s Happening in the Insurance Market?
Let’s break this down with some insurance basics. Insurance companies have to make a profit too. It’s all a balancing act of charging the right premium for the right risk so that, on the whole, the insurance company is able to collect enough premiums to pay out all the claims they owe plus their operating expenses and still have some left for a profit. Much like you, as a real estate investor, when you calculate your ROI after all of your expenses, are asking yourself, “Is it worth it”? If an insurance company has to pay out more in claims than they make on premiums year over year, why even bother? When this happens, you see carriers pulling out of a market entirely.
Overall, it’s relatively straightforward to project the statistical likelihood of claims from typical things like housefires, water damage, theft, etc. But in recent years, there has been a proliferation of catastrophic events. Who could have planned for 463,000 acres of encompassing fire to take out 14,000 structures in Northern California in one fell…