Hey there, commercial property owners! Are you feeling the pinch of rising insurance costs?
You’re not alone.
Commercial property insurance is evolving, and staying ahead of the curve is more important than ever. With robust risk management practices and proactive mitigation strategies, you can navigate these changes and put yourself in an even stronger position.
Several factors have combined to create what can only be described as a perfect storm for the property insurance market. High-magnitude catastrophe losses, lingering pandemic-related supply chain disruptions, fluctuations in the employment market, and rising inflation are all exerting pressure on the sustainability of property portfolios. This convergence of challenges has increased the costs of owning, operating, and insuring properties.
Ready to boost your resilience and safeguard your investments? Let’s explore three major trends shaping the insurance landscape in 2024.
Topics Covered
The Rise of Secondary Perils
Secondary perils are emerging as silent giants in the risk landscape.
Secondary perils are defined as minor to mid-sized events or secondary effects following a primary peril. These effects could include:
- Hurricane-induced flooding
- Storm surges
- Hailstorms
- Wildfires
- Torrential rainfall
- Thunderstorms
- Drought
Unlike primary perils, secondary perils generate low- to medium-size losses and often fly under the radar. Ignoring these risks can be disastrous.
According to AM Best, secondary perils now account for a larger share of losses than primary perils, with individual events causing upwards of $10 billion in losses globally.
Inflation has compounded this issue, as rising replacement and repair costs drive up reinsurance pricing. Some insurers respond by pushing for increased rates to accumulate capital, while others withdraw from underwriting these exposures entirely.
Flooding is a prime example of a high-impact secondary peril growing in frequency and severity. In the U.S., flooding is the number one loss leader, and it’s not confined to a particular season or location, creating unique challenges. Despite the availability of coverage options, only 17% of global flood losses between 2007 and 2021 were insured.
Businesses need to prepare for the possibility of property damage and know how quickly they can resume operations after a flood. Extended power outages and other business interruptions can significantly impact a company’s ability to recover.
Increasing Reinsurance Costs
With reinsurance rates climbing and insurers adopting a more cautious approach to risk, commercial property rates saw an average increase of 11% by the end of 2023. This marks the 24th consecutive quarter of year-over-year rate hikes. However, despite these headwinds, there are early signs of increased stability in the market for the first time in six years.
In 2023, the reinsurance market faced its most challenging conditions in decades. Policy structures shifted, leading to increased retentions and significant price hikes—up to 50% in a year- the largest jump since Hurricane Katrina in 2005. This cost surge forced insurers to cut their limits, absorb higher retentions, and contend with rising premiums. Active secondary perils and changes in reinsurance structures also meant insurance carriers had to cover losses on their balance sheets instead of passing them back to reinsurers.
Hence, insurance premiums are increasing as costs are passed onto consumers.
However, so far in 2024, volatility in the reinsurance market seems to have stabilized, which is bringing more optimism into the market, leading to a gradual return of appetite and capacity among reinsurers. Reinsurers are considering types of coverage previously excluded or restricted, including terrorism and strikes, riots, and civil commotion.
How much, though, remains to be seen.
Property owners need to stay informed about these trends, monitor market developments, and understand the factors driving reinsurance costs to prepare for potential challenges and opportunities.
Underinsured Properties: Bridging the Coverage Gap
In the world of property insurance, underinsurance is a significant issue that can expose owners to substantial financial risk in the event of a loss. In 2024, the problem of underinsured properties is more pressing than ever.
In our post-pandemic world, record-high inflation, supply chain issues, labor shortages, and rising materials costs have led to an alarming situation: an estimated 87% of buildings are undervalued. Even more concerning, 68% of these properties are underinsured by 25% or more, and 19% are underinsured by 100%.
How does this happen?
Property owners and underwriters have historically renewed policies without thoroughly reevaluating property values, leading to a false sense of security. Many businesses have not adjusted their coverage to reflect the increased costs of rebuilding or retrofitting properties to meet current standards and regulations. This has created a gap between the actual property value and the insured amount, significantly increasing financial vulnerability.
Ensuring adequate coverage is essential to safeguard against potential catastrophic events. Rebuilding or repairing your property in today’s economic climate is more expensive than ever. Materials costs have soared, labor is in short supply, and inflation continues to increase prices. By regularly reassessing property values and updating coverage accordingly, property owners can protect themselves from these escalating costs and ensure they are fully covered in the event of a loss. Avoiding such an outcome is as easy as getting a thorough assessment and adjustment of your policies with your local insurance expert.
Tips to Protect Your Business
When it comes to risk management, it’s easy to feel overwhelmed. But fear not! Working with a qualified insurance expert is a fantastic first step, and there are additional proactive measures you can take. Let’s dive into some strategies that can help you better assess and manage your risk.
#1 – Conduct Comprehensive Valuations
Conduct thorough and regular evaluations of property values to ensure that insurance coverage reflects current market conditions. Accurate valuations are essential for effective risk management:
- Validate building, equipment, and business interruption values: Use multiple benchmarks, third-party tools, and risk scores.
- Challenge inflationary factors: Ensure that values presented by carriers are justified and fair.
- Ongoing reviews: Perform annual adjustments to maintain adequate risk management.
#2 – Ensure Data Quality
Collaborate with underwriters to build risk assessments based on precise and up-to-date information. Here’s how you can stay on top of data quality:
- Identify and rectify missing data: Ensure your risk profile is accurate by filling in gaps.
- Regular reviews: Maintain high standards of data quality through consistent evaluations.
#3 – Utilize Analytics
Stand out to insurance carriers by leveraging advanced property assessments and risk modeling. Here’s how to do it:
- Differentiate your risk profile: Use robust asset valuation methodologies, especially for unique operations and equipment.
- Re-evaluate your risk tolerance: Adapt your strategy as your exposures and the insurance market conditions change.
- Financial approach: Evaluate the trade-offs of retaining risk versus transferring it to insurance carriers. This empowers you to make informed, strategic insurance decisions aligned with your long-term capital risk goals.
#4 – Achieve Cost Efficiency
Optimize your risk management investments with a focus on cost efficiency:
- Analyze past losses and current exposures: Use this analysis to develop strategies that actively reduce overall risk.
- Map out potential loss scenarios: Prioritize recommendations from carriers and make informed decisions to optimize risk management.
- Negotiate coverage terms: Ensure your coverage aligns with your business needs by negotiating reasonable terms.
#5 – Consult with Experts
Work with insurance professionals to understand the implications of underinsurance and develop strategies to address any gaps in coverage.
#6 – Update Your Policies
Make necessary adjustments to insurance policies to ensure adequate coverage for the total replacement value of properties.
#7 – Stay Informed
Keep abreast of market trends, economic factors, and changes in regulations that could impact your property values and insurance needs. By implementing these strategies, you can take control of your risk management and make informed decisions that protect your business and align with your long-term goals.
Final Thoughts
Partnering with a qualified insurance expert is a decisive first step, but the journey doesn’t stop there. Regular property valuations, consulting with experts, and updating policies to reflect current market conditions are essential to bridge coverage gaps and safeguard against financial losses.
As the landscape of commercial property insurance continues to evolve, property owners and operators must remain vigilant, adaptable, and proactive. By understanding the trends, leveraging available resources, and implementing robust risk management practices, stakeholders can weather the storm and thrive in this new era of insurance. Partner with your insurance expert and embrace these steps to navigate the complexities of risk confidently!
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*Disclaimer: We offer content for informational purposes; Co-operative Insurance Companies may not provide all the services or products listed here. Please get in touch with your local agent to learn how we can help with your insurance needs.
Sources
CBIZ. Navigating the 2024 Commercial Property Insurance Market | Property & Casualty. https://www.cbiz.com/insights/articles/article-details/insights-into-the-current-commercial-property-insurance-market-property-casualty
Insurance Journal. Rising Costs of Secondary Perils Force Reinsurers to Require Higher Attachment Points. https://www.insurancejournal.com/news/international/2023/01/31/705330.htm
Marsh Mclennan Agency. 2024 Commercial Property Insurance Trends. https://mma.marshmma.com/l/644133/2024-02-20/2k42zd/644133/1708436773uPCv0u38/MMA_BI_PropertyReport2024.pdf
Risk & Insurance. Commercial Real Estate to See Improved Property Insurance Market. https://riskandinsurance.com/commercial-real-estate-to-see-improved-property-insurance-market/
Travelers. 6 Forces Driving Commercial Property Insurance Costs. https://www.travelers.com/resources/business-topics/insuring/factors-affect-insurance-costs-commercial-property