The US property and casualty (P&C) insurance market is
undergoing a seismic shift, driven by escalating climate risks and
rising claims. But in many high-risk states, regulatory constraints
prevent insurers from fully adjusting premiums to match the growing
exposure. As a result, rather than simply charging higher rates,
many insurers are pulling back — scaling down coverage,
tightening underwriting standards, or exiting certain markets
altogether.

This shifting landscape is increasingly affecting the commercial
real estate (CRE) sector. Developers, lenders, and investors are
facing a new reality in which insurance coverage is more expensive,
harder to secure, or even unavailable in some high-risk areas.

At Goodwin’s 2025 Real Estate Capital Markets (RECM) Conference,
Pari Sastry, assistant professor of finance at Columbia Business
School, outlined how these forces are reshaping the economics of
real estate insurance, forcing stakeholders to rethink risk
management, financing, and long-term investment strategies.

This article highlights key insights from Professor Sastry’s
talk. Watch her full presentation for more detail, including
analysis of how climate change is affecting residential markets:
“The Growing Impact of Climate Change on Real
Estate Coverage.”

Surging Development in High-Risk Areas

Insured P&C losses have exceeded $100 billion globally for
the past five consecutive years, according to Swiss Re, with the US
accounting for about two-thirds of the global total of $135 billion
in losses in 2024. Several factors are contributing to rising
claims, including climate change, inflation, rising construction
costs, and an increasingly litigious environment. However, the
primary contributor is surging development in high-risk areas that
are prone to natural disasters such as fires, floods, and
hurricanes.

For instance, residential housing development has steadily
increased in areas that are vulnerable to such risks. According to
Redfin, 55% of US housing stock is now located in zones with high
fire risk — almost twice as much as in the 1980s. This
dramatic increase in development, coupled with rising population
growth in these high-risk areas, has substantially heightened the
potential for catastrophic losses, driving up insurance
premiums.

Regulations Often Exacerbate the Challenge

In many states, insurers are limited in their ability to adjust
premiums in response to the increasing risks posed by climate
change. In states such as California, Florida, and Texas, for
example, insurers need approval from regulators to raise premiums,
often capping premiums. This regulatory constraint creates a
disconnect between the actual risks and the premiums charged to
property owners, including those in the CRE sector.

This not only makes it difficult for insurers to price policies
in ways that enable them to turn a profit but also puts many of
them at significant risk of insolvency. As a result, many insurers
are exiting or scaling back their operations in certain markets. An
increasing number, including large national insurers, have stopped
offering new policies in high-risk areas, and others are
significantly reducing their coverage options in those areas.

This creates a precarious environment for CRE investors who may
find themselves unable to secure adequate insurance coverage.

What Can Developers, Investors, and Governments Do?

CRE developers and investors may be able to secure lower
premiums by integrating resiliency measures into new developments,
including investing in construction methods or materials that
reduce the risk of damage, such as wind-resistant roofs or flood
barriers. But it remains unclear how much a given investment will
affect premiums in practice.

Some large CRE firms have begun to explore alternative insurance
models, such as self-insuring or utilizing catastrophe bonds (cat
bonds) to diversify risk. Companies such as Blackstone and Apollo
have developed in-house insurance strategies to hedge against
rising premiums and climate-related risks. This strategy allows
them to better control their risk exposure and maintain coverage in
an increasingly uncertain market.

Some states are exploring reforms to allow insurers more
flexibility in adjusting premiums, loosening regulations to allow
insurers to raise premiums so they more accurately reflect the
risks posed by climate change and natural disasters. Such
adjustments would likely lead to higher premiums in high-risk areas
but could slow insurer exits from these markets.

Governments may begin to put more emphasis on resilience,
particularly in high-risk areas. This could include investing in
infrastructure improvements such as flood control measures or
wildfire prevention programs to mitigate the impacts of climate
change. Zoning regulations that limit new development in
particularly dangerous areas and stricter building codes could also
be part of the solution, helping to reduce future risk and the
associated insurance costs.

* * *

Climate risks are reshaping the insurance market and how real
estate stakeholders approach risk management. While some relief may
come from innovative insurance strategies such as self-insurance
and capital market – based solutions, the industry must
remain agile in responding to the dynamic and increasingly complex
environment.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.