Residential Property Insurance Risk By Location

by Don Epley PhD CCIM MAI
Professor of Real Estate
Director, Center for Real Estate & Economic Development
University of South Alabama
5811 USA Drive, MCOB-Rm 126
Mobile, Al 36688-0002
251.460.6725   depley@southalabama



Executive Summary

This project used a unique insurance data set released recently by a state insurance agency to examine the average overall capitalization rate by location. The intent was to determine the more risky locations that would be expected to show a higher macro cap rate which would cause a higher insurance premium. Higher insurance premiums provide a fertile environment for a lower sales price on residential properties. In the year 2012, locations not touching the ocean illustrated the highest risk levels. In the year 2009, locations on the water were the highest. Rates of change between the two locations for 2009 and 2012 were approximately the same. This project illustrated data and data sources which a practicing appraiser could evaluate and use, and provides a benchmark that does not exist currently. It provides the local appraiser guidance on risky locations where insurance premiums can impact residential sales prices.

The commonly known overall capitalization rate, Ro, was used to combine premiums, losses, and property values by zipcode, The rate produced using total numbers by location is the macro risk-rate as it includes current numbers for premiums and losses that reflect actual market numbers. The residential property values by zipcode were supplied by the local tax assessor.

Owners of residential properties located near the Gulf Coast have voiced significant. concern in recent years over increases in insurance rates. Rate increases have occurred with an increase in discounts and even total cancellation of loyal long-time customers when the only reason appears to be a location tentatively labeled as high-risk. Cancellations were a frequent occurrence in the months and years after Katrina with little prior communication from the insurance company. This needed project adds information to the research literature on residential risk by location and helps examine local market conditions.

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