Investing in real estate, as with any industry, comes with a certain degree of risk. Investors do everything they can to mitigate these risks, and one of the best tactics at their disposal is purchasing insurance to protect their properties. The importance of property insurance in the real estate investment world cannot be overstated.

Investopedia boils the importance of property insurance down simply: “The basic goal behind buying any insurance is to make you financially whole following a loss." Particularly if you own expensive property, it must be protected with insurance so that if something unforeseen occurs that damages or destroys the property, you can recoup some or all of your investment. As the adage goes, "Nobody needs insurance, until they do." That's why it's best to remain covered, so in times of worry, you can find solace and security in your coverage and know that your finances can weather the storm (sometimes literally).

Why Insurance Premiums Are High Right Now

When it comes to insurance premiums, there are two types of periods: hard markets and soft markets. Soft markets are great for buyers. They are when coverage is broad and rates are low. Hard markets, on the other hand, are when rates are high and coverage is limited. These hard markets typically occur while the economy is struggling, or during times when there is an unusually high number of natural disasters. Ultimately, when settlements and claims filed begin to approach or even exceed the premiums being collected, rates rise and a hard market begins.

In 2021, we are currently in a hard market. One of the primary reasons is the low interest rates. Because interest rates are still so low, due to the economic downturn from the COVID-19 pandemic, insurance companies are not receiving as much return on their investments. This means that “today’s returns are not sufficient enough to cover existing settlements and new claims,” which causes premiums to rise to make up for the losses. The good news is that the market will eventually transition back to a soft market. The bad news is that predicting when that transition will occur can be extremely difficult. Fortunately, there are steps real estate investors can take in the meantime to remain protected and still improve their returns.

Importance of Property Insurance for Real Estate Investors

Rising insurance premiums can sometimes be enough for real estate investors to drop coverage on their properties, but those investors should remember the importance of property insurance in the first place. Protecting your properties with insurance is a smart move, and if you are investing in real estate then even during periods with high premiums you should continue to seek coverage. Ultimately, property insurance exists to help owners and investors mitigate risk to their properties.

One of the most important steps that real estate investors and property owners can take during these hard markets is to re-evaluate their property insurance coverage. Sit down with your agent and conduct a full audit of your coverage. After all, when premiums are low, coverage is rarely scrutinized. But now you may be able to customize your plan so that your coverage is exactly what you need and you are not needlessly paying for something that will not help offset potential risk. This practice will help any real estate investor wade through the waters of high insurance premiums and make it to the next soft market.

For more information about property insurance from trusted industry experts, visit the Coastline Equity news section.