Why Are Commercial Property Insurance Costs So High Right Now?

The market for commercial property insurance has been getting more and more challenging over the past couple of years and it’s feeling like there’s no immediate end in sight.

Over the past 12 months, we’ve seen countless insured’s get non-renewed on their property insurance policies even with no claims. Very few markets are looking to write new business unless a risk is impeccable. Underwriting is tight and it seems like you have to go through hell and back providing loads of information to carriers for review.

In many cases, coverage is getting cut in half with limitations and endorsements and premium is doubling. It’s frustrating to be in the thick of all of it. No doubt, this is the hardest property insurance market we’ve seen in a generation.

So, why are commercial property insurance costs so high you ask?

Here are several factors contributing to premium increases for commercial property insurance coverage:

Catastrophe Losses: Hurricanes, floods, wildfires, tornadoes, winter storms. The frequency and severity of major catastrophes continue to stress the industry. In five of the past six years, these events have caused annual insured losses of more than $100B. Last year, total insured losses globally were estimated at a shocking $140B.

Reinsurance: Catastrophic events are a major factor driving up the cost of reinsurance — an expense carriers need to pass along to policyholders. Call it a perfect storm, but inflation and the economic environment has been making reinsurers more selective.

Underinsurance: High inflation has driven the cost of materials and services much higher, but not even half of business owners say they have increased their policy limits to accurately reflect what it would take to replace insured property now. Policyholders must have accurate valuations for their assets so they don’t come up short after a loss, and premiums will reflect those higher values.

Property Replacement Costs: Led by sizable increase in the cost of structural steel and the price of lumber, construction costs have jumped over the past few years. Similarly, machinery and equipment costs have increased over the same period. Also, many are still dealing with materials shortages and supply chain disruptions.

Skilled Labor Shortage: Nearly half of reconstruction costs are wages and salaries, which have increased over the past few years. Even with higher pay, contractors are struggling to find skilled labor and are delaying projects as a result. Higher rebuilding costs and longer delays may trigger an increase in business interruption losses.

Property Rate Need: For years, rising loss trends have outpaced rate increases, primarily because of the costs of catastrophes. Carriers need to continue to raise rates to try to close the gap.

In a nutshell, it’s a “perfect storm” of these variables that have really put the commercial property insurance market in a tough spot. And in talking to many professionals in the industry, this doesn’t seem to be ending any time soon. Maybe by way of a miracle we can get a year with [much] lower than average catastrophe loss? That would be a good start. And we definitely need inflation to level out too. Maybe we can get the perfect storm to happen the opposite way to get us back on track for a more stabilized commercial property insurance market. Fingers crossed.

Source: Travelers