How Banks Can Address a Risky Insurance Market

With premiums rising and insurance becoming harder to secure, today’s volatile insurance market poses serious risks to banks and borrowers alike. A recent RMA Journal article discusses key steps banks can take to address these challenges: 

• Properly reflect insurance costs in underwriting. According to a report for RMA’s Climate Risk Consortium by McKinsey, banks should make insurance costs a greater focus when evaluating borrowers, especially as premiums continue to increase. Suggestions include adjusting debt-to-income requirements at loan origination to account for rising insurance expenses borrowers may face over time. This focus can be especially important for high-risk areas like multifamily housing and office properties, where rising insurance costs add to financial pressure. 

• Plan for long-term insurance market stress. Many factors—including climate change—are pushing insurance rates upward, with no relief in sight. Insurance premiums have historically followed property values—including when those values fell. But as extreme weather events increase, that relationship could weaken. Banks can develop strategies to manage these risks by using granular data on local economic trends and property vulnerabilities. This level of detail allows banks to assess the effects of climate risks on creditworthiness in specific regions. 

• Strengthen collateral insurance monitoring. Insurance coverage on collateral is essential for banks, and more stringent monitoring may be necessary as costs rise. To prevent lapses in coverage, banks should enhance their tracking efforts and consider software to ensure continuous insurance coverage. Regularly auditing insurance tracking processes is also recommended to catch gaps before significant risks are realized. Additionally, blanket policies can offer some protection in case individual coverage is missed, although these policies cannot replace monitoring in the case of properties covered through the National Flood Insurance Program.  

Through proactive steps like these, banks can strengthen their defenses against the potential fallout from an increasingly unpredictable insurance market, protecting both their own financial stability and that of their borrowers. 

Want to dig deeper? Read the full article.