A row of small, two-story houses with pitched roofs on a paved street. They alternate in color between yellow and medium gray, and some have shrubs in the front yards. There are no cars n the street.

Reported ArticleCommunity Development Field

Soaring Property Insurance Rates Threaten Affordable Housing Development

Rapidly rising insurance premiums are forcing affordable housing developers to cut back on programming, lay off staff, and even sell. To add insult to injury, some insurers also seem to be adding penalties or withdrawing coverage for housing voucher holders.

Casitas Los Olmos, Brownsville, Texas. Photo courtesy of CDCB

Shelterforce
View from one end of the front of a long motel-like apartment building. The brick front is painted a sage green, and a roof overhangs the concrete walkway. Slatted wooden benches are placed between the front doors, which are a darker green than the building. In front of the building are shrubs including crape myrtle, and on the other side of the small yard can be seen part of a similar-looking building.
Las Brisas, an apartment building in central Houston. Photo courtesy of Avenue

Las Brisas is a sprawling, two-story 68-unit apartment building in central Houston that resembles a motel. Since buying the property in 2012, local community developer Avenue has operated it as affordable housing, with rents as low as $720. As the neighborhood began to gentrify, with vintage shops and indie theaters springing up nearby, developers made repeated efforts to buy Las Brisas from Avenue. Avenue, however, was committed to its affordable housing mission and until recently had been planning to rebuild new affordable housing on the site.

But recent astronomical increases in insurance premiums changed the calculus for Avenue. Avenue CEO Mary Lawler says their insurance costs have increased by more than $1 million in the past few years. Insurance premiums on one Avenue property doubled last year and have tripled since 2020. “Our projected loss on our overall portfolio is now about $1 million,” says Lawler. “Not every property has always made money, but some properties were throwing off positive cash flow, and that could help to support properties that weren’t. But the whole portfolio is basically losing money at this point. We can’t go on like that.”

Avenue put Las Brisas on the market in January and has already received several offers. Lawler expects that the future buyer will demolish the property and build new market-rate units on the lot, meaning that Houston, already in a housing crisis, will lose a valuable block of affordable housing. It’s a story that could become much more common across the U.S. as owners and developers of affordable housing are squeezed by property insurance rates that, for some developers we spoke with, have more than quadrupled.

Insurers have raised premiums for property and liability insurance for all types of property for several years running, citing impacts from extreme weather events caused by climate change, the lightly regulated international reinsurance market, and rising rebuilding costs. In states like California and Florida, which have been hit hard by wildfires, flooding, and hurricanes, many big insurance companies have either stopped writing new policies or left the state entirely, resulting in less competition and higher premiums for flimsier policies with more exclusions.

Insurance companies defend these rate increases as necessary to remain solvent, but recent reports of record profits suggest that’s not entirely the case. And many affordable housing advocates contend the industry is using legitimate climate change risk issues as cover to illegally raise costs for or deny coverage specifically to properties that house tenants using Section 8 vouchers.

With the U.S. already in a severe housing affordability crisis, skyrocketing insurance rates threaten to reduce the amount of affordable housing stock by rendering older units uninsurable and stalling or even canceling projects in developer pipelines. In the absence of a rapid policy response from state and federal government, many developers of affordable housing say these price increases represent a grave and perhaps existential threat.

“There’s going to have to be policy and other solutions developed within the next two years,” says Erich Nakano, executive director at Los Angeles-based community developer Little Tokyo Service Center. “Otherwise we’re going to see a lot of buildings start to go under.”

Hitting Affordable Housing Hard

Rapidly rising premiums have affected all U.S. property owners, but properties that provide housing affordable to lower income households have been hit hard. Fifty to 70 percent of the portfolio of Holos Communities in North Hollywood, California, is occupied by formerly chronically homeless individuals. Insurance costs on that housing that have gone from an average of $400 per unit per year to over $1,800 in a single year.

While private homeowners can choose to forgo insurance when premiums become unaffordable—an increasingly common practice sometimes referred to as “going bare”—affordable housing developers don’t have this option. (Nor would it be responsible to do so.) Owners of market-rate rental housing can pass increased insurance costs onto tenants, but many affordable housing operators are limited in how much rent they can charge. (And even when they’re not precluded from increasing rents, it’s often incompatible with their mission.)

And it’s not just a matter of having some insurance. Affordable housing developments are financed with a mixture of public and private money, and each lender and equity investor comes with their own insurance requirements.

“It’s the same as if you were going to go buy a house and you had 13 different mortgages on it,” says Logan O’Phelan, director of operations at Holos Communities in North Hollywood, California. “A lot of compliance, a lot of loopholes you got to figure out.”

Many affordable housing developers also say those requirements from lenders and investors are excessive. “Not only do we have to have [standard] insurance, we have to have premium, expensive insurance that covers every imaginable thing,” says O’Phelan. “That’s the equity provider’s way of protecting themselves in a way that it’s like zero risk, but it’s another part of the problem.”

For organizations like Holos, the financial pressures resulting from being squeezed between rising rates and unyielding insurance requirements can be intolerable. Some properties have had to draw heavily from cash reserves to cover a single year’s premiums, a practice that’s plainly unsustainable. Projects in the pipeline that can’t absorb doubled or tripled insurance costs have stalled just short of the finish line. O’Phelan described one project that finished construction and was almost fully leased when it ran into last-minute problems in converting to permanent financing. “This would be the stage where basically you take out a different loan, a longer like 20- or 30-year loan that retires everything else that you use to pay for construction,” O’Phelan says. However, because of increased insurance costs, their operating expenses were going to be too high to meet the requirements for that loan with traditional lenders, leaving the group to scramble to arrange unconventional financing with a local CDFI that doesn’t usually do that kind of lending. Not all developers would have that option open to them.

Some developers have gone to their investors and asked them to relax their insurance requirements. Avenue, the Houston-based community developer, saw premiums double in 2023 and laid off office staff and canceled community programming like homebuyer education classes as a result. “We were budgeted for an increase, but certainly not that kind of an increase,” says CEO Lawler. When these cutbacks still weren’t enough, Avenue went to investors and asked them to amend partnership agreements that required “quite low” deductible levels. Most investors agreed, allowing Avenue to adjust some of its policies—to the point where increases ended up at “really bad” instead of “terrible.” But one investor hadn’t yet agreed to even that. With its cash reserves drained by insurance premiums, Avenue had to turn to the philanthropic sector for new grants to be able to complete a previously planned and funded set of energy-efficient capital improvements to their housing.

Discrimination by Proxy

Increased risks from climate change are a reality in many places. But climate change risk factors are not the only thing driving the increase in cost. Many developers have also reported being asked more explicit questions in the last few years by insurers about how many rent-subsidized tenants they have, and there’s a widespread belief that the presence of these tenants results in higher premiums or even non-renewals. Recent reporting in Gothamist found that insurers in New York City routinely deny coverage to properties that house tenants who used Section 8 vouchers, classifying them as “ineligible risks.”

Denying coverage or raising rates based on the presence of rent-subsidized tenants fits the definition of “source of income” discrimination, which is banned in some states, including New York and California. But while the practice has come to the attention of state regulators, as well as the New York Attorney General’s office, advocates are still waiting to see any enforcement activity.

Even where asking about tenants with rent vouchers isn’t explicitly banned, those questions are widely recognized as racial “discrimination by proxy,” because historical patterns of discrimination affect who is perceived to use housing vouchers today.

A small green house on a lot not yet planted with grass or shrubs. Vertical siding is light green, and the entryway at the right is overhung by a roof. At left is a similarly designed house in dark blue. Behind the houses the bright blue sky is dotted with cirrus clouds.
Casitas Lantana, Brownsville, Texas. Photo courtesy of CDCB

This practice has become common in Texas, for example, where insurers have become bolder in interrogating owners about rent-subsidized tenants, according to Daniel Elkin, director of policy, impact, and innovation at CDCB, a nonprofit housing developer in Brownsville, Texas. He says his members have grown accustomed to “getting asked by their insurance providers how many Section 8 vouchers do you have in your multifamily, how many Title 42 tenants do you have in your units. . . . They used to skirt around it or find more indirect ways to kind of figure out some of that information . . . I’d say in the last two or so years, it’s been much more blatant, because I think they know that there’s not necessarily recourse on the other side. I mean, we can’t prove that that’s what’s impacting the cost increase. But they don’t ask those questions for no reason.”

Insurers claim low-income housing is associated with higher crime rates and more frequent claims, but there’s little data to support these conclusions. In fact, most studies have found that there’s either no association between voucher holders and crime, or that voucher holders are associated with lower crime. For their part, developers say rent-subsidized tenants are their most stable.

“There is a perception that there’s more risks inherent in our housing, and that our residents may be more likely to bring liability claims,” says Avenue’s Mary Lawler. “In fact, knock on wood, Avenue has had no claims for years. And yet our rates have gone up regardless.”

Regulatory Weakness

While state insurance regulators have a mandate to protect consumers, regulators have been reluctant to exercise this power. In Texas, which has the second-highest property insurance rates in the nation, regulators haven’t seriously challenged insurers’ rate increase requests since 2003, when the state legislature passed a law requiring a rate review. Even in California, one of the states where regulators have shown a willingness to stand up to the industry, the state’s insurance commissioner recently made huge concessions to lure some insurers back to the state.

This lack of effective oversight allows insurance companies to pick and choose who they cover, withdrawing coverage from properties they deem risky or potentially unprofitable. Douglas Heller, director of insurance at Consumer Federation of America, believes this is what’s driving insurers’ sudden aversion to rent-subsidized tenants.

“There is a long history of insurers overcharging poor people and communities of color or using underwriting rules aimed at avoiding these communities,” he says. “To the insurers, poor people just are not profitable enough, because they don’t buy lots of insurance or other affiliated financial products. Even if these prospective customers are low-risk, insurers would rather serve clients who buy more coverage and more products. I think the insurance crisis facing affordable housing and community development organizations is driven by some of that same bias, in which the organizations that provide affordable housing to lower-income Americans do not yield the volume of business that comes from the bigger market-rate housing developers, so the insurers don’t worry about turning their backs on these community developers, just as they have historically turned their backs on the communities themselves.”

Experts say this points to a fundamental contradiction at the heart of the insurance industry; while it fulfills many of the functions of a public utility, it’s run as a for-profit enterprise. Like drivers, affordable housing providers are required to carry insurance, but have little recourse when insurers raise prices or deny them coverage. Even the industry’s state-by-state regulatory structure has worked to undermine real oversight. When insurers withdraw from a market, as they have recently in Florida and California, they usually do so under the pretense of “business considerations.” But Heller says this is really just a hardball negotiating tactic—once they extract concessions from the state government, as they recently did in California, they return to conduct business on more favorable terms. It’s an asymmetrical power relation that lends itself to abuse.

“The regulatory oversight is just too weak,” says Heller.

While affordable housing providers and homeowners struggle with sharply increased premiums, insurance companies are quietly banking more profit than ever before. The Wall Street Journal reported recently that Travelers, Allstate, and Progressive, three of the nation’s largest insurers, made record profits in 2023. The Journal dryly noted that “insurers say they now see a path to profitability”—through “big rate increases.” With state regulators putting up very little resistance, there isn’t much incentive for insurers to show restraint. Speaking on rate increases at an investor conference in December 2022, Allstate CEO Tom Wilson admitted, “we may overshoot a bit.” A little over a year later, Allstate shares have hit an all-time high to go with record profits.

Meanwhile, properties that offer affordable housing are burning through cash reserves or taking out lines of credit to pay premiums, which increases costs over the long term. And there isn’t much hope that insurers will lower rates after a record year, says CFA’s Heller. While insurance companies are quick to pass on increased costs to consumers, they’re very reluctant to pass on savings. This mirrors the general consumer experience of the economy’s recent spike of inflation; prices may eventually stop increasing, but they rarely go back to previous levels. On the contrary: developers are being warned to plan for big premium increases again next year.

Solution Suggestions

Every affordable housing developer interviewed for this article had suggestions for policy solutions. Some suggested government-backed statewide insurance pools; others were exploring self-insurance, an approach that would insulate them from fluctuations in the market but requires a large amount of capital upfront. Some suggested expanding state-run “insurers of last resort,” while others wanted to eliminate them entirely, on the theory that they actually drive up insurance rates. Some, like Avenue, were already speaking to their investors about raising deductibles or adjusting liability requirements. Some suggested that insurance companies create pools of lower-cost insurance for those properties that are below a certain threshold of risk from extreme weather, though this would reproduce past inequitable patterns, as lower-income people have often been forced to live in places more vulnerable to things like flooding. Other suggestions included moving to a lower premium, higher deductible insurance model, and asking tax credit syndicators to create their own captive insurance programs. But everyone agreed that drastic measures are required, and fast.

Lawmakers have started to take note of their struggles. Rep. Adam Schiff introduced a bill earlier this month that would create a public reinsurance fund, so Americans would have an alternative to the unregulated global reinsurance market. (Reinsurance is essentially an insurance policy purchased by insurers to protect themselves in the event of, say, a catastrophic weather event that leads to a cascade of claims. Most of the major reinsurance companies are headquartered outside the U.S., so their rates aren’t subject to U.S. regulations; a big chunk of recent insurance premium increases are the result of rate spikes in the reinsurance market.) Developers have also focused their hopes on the Nonprofit Property Protection Act, which would allow affordable housing organizations and other nonprofits to create their own property insurance markets through the formation of “risk retention groups.”

Another thing all the affordable housing developers agreed on was that addressing climate change would be one of the best ways to bring insurance premiums under control. Some portion of today’s exorbitant insurance premiums can be called the price of our past inaction on the issue. But mitigating the effects of climate change is easier said than done, and a politically charged matter.

As usual, the most vulnerable have been the first to feel the pain—but it won’t stop there. “We’re the canary in the coal mine,” says Daniel Elkin, referring to affordable housing providers. “Hotel owners have reached out to us and been like, hey, are you guys feeling this? Everybody that owns property, single family, homeowners even, we’re all getting hit by this in a way that’s unsustainable. So it gives us hope in a way, like the whole system is going to burn down.”

Reining in insurance costs will take a multipronged approach—short-term relief for the most financially stressed providers of affordable housing, medium-term policy prescriptions on the state and federal level, and a long-term plan to meaningfully tackle climate change. At the same time, state regulations governing insurance markets must be reformed to serve the interests of vulnerable consumers.

State regulation “is ripe for reform,” says Heller. “But reform takes guts, and it takes time. The government moves slow, and this is a very urgent problem. It’s one of those things where we may figure out the perfect way to address this 15 years after many communities are completely underwater.”

 

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