The insurance crisis in Florida and California is expanding, and your state could be the next to be affected.

• Insurance premiums are rising in many states following multiple climate disasters.
• The cost and availability of insurance are causing deals to fall apart in both the residential and commercial real estate markets during the crisis.
• The competitive landscape is being altered by the varying impact of insurance issues from state to state.

The escalating insurance crisis is driving up premiums and causing carriers to abandon coastal states such as Florida and California, resulting in a fundamental shift in the real estate market nationwide.

Bill Baldwin, owner of Boulevard Realty in Houston, stated that not only is the cost higher than anticipated, but the inability to secure insurance also causes deals to fall through before they even begin.

As deals are about to close, increasingly, brokers are seeing insurance companies making nearly impossible demands, said Baldwin.

The homeowner wants to replace their seven-year-old or ten-year-old roof and have trees cut down that are within 20 feet of their house, even if they are on the neighbor's property.

"If you can't obtain insurance due to a failure to meet certain conditions, the sale will not proceed."

In commercial real estate, a similar dynamic is occurring, as stated by Ross Markowitz, the director of insurance risk management at AEW Capital Management, a global real estate investment advisory firm located in Boston.

"We must educate our internal teams on the pricing of our insurance products, as buyers may not be able to obtain this information, leading them to offer less for the deal."

Mounting insurance losses

The staggering losses for the insurance industry from natural disasters, including nearly $80 billion in insured losses last year alone, have been ongoing for several years.

Insurance companies are increasingly interested in the data provided by First Street Foundation, which quantifies climate-related risks, according to Jeremy Porter, head of climate implications at the nonprofit.

He stated that insurance companies are addressing the increasing occurrence of severe climate events and the resulting higher payouts, which exceed their earnings.

Insurance carriers are rushing to maintain their financial ratings and, in certain instances, simply to remain operational, according to Leash Yu, managing director of personal lines at Higginbotham in Houston.

"Some carriers are drastically increasing rates, getting rid of risks, and severely limiting the type of new business they allow."

Hurricanes, wildfires and extreme premiums

Florida, which has experienced three major hurricanes in two years, has seen its policyholders pay nearly five times the national average for car insurance, according to Insurify. Due to multiple carriers leaving the state or going out of business, Citizens, Florida's insurer of last resort, has seen its policy count triple to nearly 1.2 million in four years. Now, Citizens is requesting regulators to approve a 14% rate increase.

Since at least eight carriers have departed or reduced their operations in California, the state's insurer of last resort, the California FAIR Plan, has experienced a 14% increase in policyholders this year and a 137% increase since 2019.

According to Insurify, homeowners in Louisiana are paying approximately three times the national average.

Competitiveness concerns for corporations

"According to John Boyd, Jr., a principal with The Boyd Company in Florida, high insurance rates pose a significant challenge for companies looking to recruit and retain a workforce from a site selection perspective. With record home prices, high mortgage rates, and soaring child-care and health-care costs, transferees are already under immense pressure. The insurance crisis only exacerbates this problem, making it even more difficult for companies to attract and retain top talent."

Due to the influence of higher insurance premiums on commercial real estate, CNBC is incorporating insurance into the 2024 America's Top States for Business study. In this year's methodology, the Cost of Doing Business category takes into account regional commercial property casualty premium increases, as compiled by the Council of Insurance Agents and Brokers. The Cost of Living category examines the cost of insuring a median-priced home in each state, based on data from the National Association of Insurance Commissioners and Redfin.

According to the 2021 premiums, the most expensive state to insure a median-priced home was Colorado at $2,650 per year, followed by Florida at $2,474, Massachusetts at $2,226, Texas at $2,194, and California at $2,124. On the other hand, the least expensive state was Wisconsin at $702.

Risk of policy higher rates could ease in 2025

Some experts believe that the insurance industry may soon experience relief from its cyclical nature, as insurance companies strive to improve their financial performance.

If the rate increases, and the risk reductions and claims mitigation efforts are successful, then hopefully, by 2025, we'll see a leveling off, said Yu.

However, some states are not waiting.

Florida's Gov. Ron DeSantis signed a tort reform bill last year to reduce policyholder lawsuits and attract insurers back to the state. Meanwhile, California's Gov. Gavin Newsom proposed making it easier for insurers to increase rates and requiring them to write more policies in distressed areas.

Real estate broker Bill Baldwin is advising clients to obtain insurance approval beforehand, similar to how they get pre-approved for a mortgage.

"He stated that it is necessary to obtain insurance earlier than ever before in the process, which is not something we are accustomed to."