The price is right? Forecasting the Impact of Climate Volatility on Real Estate Insurance Premiums
Climate change poses unprecedented challenges to the real estate sector, particularly insurance risk and pricing. Indeed, according to a June 2024 article in PERE, soaring insurance premiums are “killing deals” in commercial real estate. As we laid out in a previous article on underwriting physical risk in commercial real estate, rising insurance premiums can have a significant impact on operational expenses, cash flow modeling, net operating income and ultimately exit valuations.
The real estate market demands location-specific risk assessments to inform long-term investment decisions, while insurers need a more robust method to price severe climate scenarios into premiums. AlphaGeo aims to provide a neutral standard for forecasting premiums that can help property managers and insurers meet in the middle.
AlphaGeo’s Insurance Premium Forecasting Tool
AlphaGeo’s insurance premium forecasting tool is based on the IPCC’s SSP 8.5 “worst case” climate scenario. This involves envisioning a climate disaster event (particularly flood, hurricane, or fire) that will cause damage to a property’s location and lead to a substantial increase in insurance premiums the following year.
The key features of our model include:
- H3 Geospatial Integration: Utilizes H3 hierarchical indexing system for precise spatial analysis
- Single-Hazard Risk Assessment: Predicts risk-specific premium growth with attribution to flood, wildfire, or hurricane risk
- Multi-Hazard Risk Assessment: Incorporates various climate risks into an aggregate projected total risk premium impact
- Visualization and API: Offers interactive dashboards and API pipeline for easy interpretation and query of results
Insurance Forecasting Examples
Applying our machine learning model to recent historical data capturing insurance premium growth in American CBSAs exhibiting high climate risk exposure, our algorithm identified patterns and generated forecasted premiums rising at anywhere from 16% to 22% on an annualized basis.
We further applied this approach to our sample portfolio of globally distributed locations, and display here examples where premiums are expected to rise based on one or more key climate hazards:
This comprehensive analysis helps investors evaluate how climate risk affects asset cash flow and determine whether an investment is justified under both normal and worst-case climate risk scenarios.
Use Cases
AlphaGeo’s predictive location analytics that provide transparent and actionable insights can be leveraged by all relevant stakeholders in the real estate sector:
- Insurers: More accurate pricing models and improved risk management
- Property Owners: Long-term visibility into potential insurance costs
- Investors: Enhanced due diligence for real estate portfolios to hedge against climate risk
- Policymakers: Data-driven insights for climate adaptation strategies
We also hope this approach can support the development of a common, reliable, and accurate standard to stabilize the real estate sector amidst rising climate volatility.
More Information…
To view AlphaGeo’s sample portfolio data including our proprietary risk / resilience scoring framework, insurance premium forecaster, and other location-specific datasets, please set up a free trial account at: https://app.alphageo.ai/trial_setup
To access our methodological whitepapers and other documentation, please visit: https://docs.alphageo.ai/
