COMMERCIAL PROPERTY owners throughout California are getting hit with significant insurance rate hikes and non-renewal notices as a confluence of factors reverberate through the market.

The commercial property insurance industry is struggling with years of losses after paying out billions of dollars annually for increasingly costly and numerous wildfire claims in California and other natural disasters around the country.
While massive costs dominate the conversation, there is another factor that is contributing just as much to rising insurer costs: The role of reinsurance.

Reinsurance explained

Just like you mitigate your risks by buying insurance, your insurance company does the same by purchasing reinsurance.
This coverage pays claims when they reach catastrophic levels or a certain threshold, like those from massive wildfires.
These arrangements call for the reinsurer to cover the cost of claims for a certain region or for a certain risk, like wildfires or hurricanes. Each reinsurance treaty is different and they are often tailor-written for individual insurance companies.

Without reinsurers taking on a good portion of catastrophic claims, insurance rates would be much higher than they are today. But that’s changing.
Reinsurers pay for a significant portion of any global catastrophe as they are the backstop for insurers around the world. And catastrophes have been growing in number and scope all over the planet.

During the first half of 2023, natural catastrophes caused $52 billion in insured damage globally, which is 18% higher than the average of $44 billion in the past 10 years and 39% higher than the 21st-century average of $38 billion, according to a report by Swiss Re.

The U.S. accounted for $34 billion of the world’s insured property losses in the first half. The nation also accounted for 13 of the 17 global natural catastrophe events that each caused more than $1 billion in insured losses, according to the report.

What reinsurers are doing

Raising rates – Reinsurance companies have been raising their rates significantly. A recent report on the trade news site Artemis.com said property catastrophe reinsurance rates had
seen a substantial average increase of approximately 30% during July 1 renewals.

Reconsidering where they provide coverage – Reinsurers have also started pulling back from covering properties in areas or regions that are at higher risk for natural disasters, particularly California and Florida, the latter due to increasingly costly hurricane damage and the former due to the increasing wildfire risk.
When reinsurers pull back, the primary insurers often have to take on more of the risk themselves.

Changing terms – Reinsurers are taking on less risk than they have in the past by raising attachment points, forcing primary insurers to take on more of the cost of claims.
Reinsurers are changing conditions for paying claims, getting more stringent in their definitions of various catastrophic events and triggers for paying claims.

The takeaway

While this hard reinsurance market continues, there is hope that rates will stabilize in the future bringing relief to insurers, and more importantly: You.
Both reinsurers and insurers are struggling to catch up with increasing costs and the “new normal.” Once they adapt, your premium may be more predictable.

CALIFORNIA INSURANCE Commissioner Ricardo Lara has issued an order that cut the average advisory workers’ compensation benchmark rate across all classes by 2.6%, starting Sept. 1.

The benchmark rate, also known as the pure premium rate, is a baseline that covers just the cost of claims and claims adjusting, but not other overhead like rents, underwriting costs, and provisions for profit.

The rate is advisory, and insurers can use it as a guidepost for pricing their individual policies. Individual premiums that employers pay will depend on a number of factors, including the pure premium rate, the carrier’s own pricing methodology, and the employer’s claims and claims cost history, location, and industry.

Why the rate is falling

The insurance commissioner’s decision cuts the average published pure premium rate to $1.46 per every $100 of payroll, compared to the current $1.50.

Despite the average rate decrease of 2.6%, individual class codes may see swings as much as plus or minus 25%. Several factors are driving the lower rate decision:

• Slowing claims cost inflation
• Falling frequency of claims
• Lower overall claims costs
• Stable medical costs
• Fewer COVID-19 claims
• Lower claims-adjusting costs.

What insurers are doing

The most recently available industry average level of pure premium rates filed by insurers with the Department of Insurance is $1.71 per $100 of payroll as of Jan. 1, 2023, which is about 14.6% higher than the current published rate of $1.50. In 2022, carriers were charging $1.68 on average.

While the workers’ compensation market remains competitive and rates continue hovering around record lows, the final rate any employer will pay will depend on several factors beyond the pure premium rate. Some employers may see rate increases instead.

Factors that can influence the prices include the employer’s:

• Industry.
• Geographical location (employers in Southern California, for example, face a unique claims environment that results in a surcharge).
• Individual claims experience.

If you’ve been involved in a large construction project, you are familiar with surety bonds and all of the underwriter’s questions you need to answer. If you’re new to the game, it can be daunting.

Many small contractors pass on bidding for projects if they require a surety bond. But it doesn’t have to be that way as long as you are prepared and know what kind of questions the surety insurer’s underwriter will be asking.

Surety bonds protect project owners from loss if the contractor’s work is defective or of poor quality, or if the contractor fails to complete the work or follow the terms and conditions in the agreement.

For example, if the contractor fails to finish a project due to a shortage of workers or financial problems, the surety company has to step in and perform in the contractor’s place. Obviously, it’s in the carrier’s best interest to insure projects where they won’t be asked to perform. As a result, the questioning can feel like an inquisition, but it’s worth it to be prepared so that the insurer underwrites the bond and you can get to work.

Other areas of scrutiny

Besides the questions in the box, the insurer will also likely want to know:

• If the start and completion dates in the contract are feasible.
• The amount of the bid bond if there is one.
• Any warranty terms and if they are sensible.
• The payment terms and if they will allow the owner to manage expenses during the life of the project.
• If there is any retainage, or the withholding of the final contract payment for a specific time period to ensure that the job has been properly completed.
• If there are any damages that are set out in the contract in case of non-performance or shoddy workmanship.
• If the contractor’s costs to complete other projects it is working on are sufficient to ensure that it can cover its general and administrative costs in the following year.

The above list is not exhaustive and some surety insurers may have different areas of interest.

The bottom line is you’ll want to make sure your finances are up to snuff and that you have a strong track record.

AS WILDFIRES grow in number, intensity and scope, the cost of paying for the resulting claims is causing a property insurance crisis in some parts of the state that shows no sign of disappearing anytime soon.
Commercial property insurance rates have skyrocketed for businesses in areas exposed to wildfire risks. Many have received non-renewal notices and have had to secure coverage with the market of last resort, the California FAIR Plan. Here’s what’s going on and what your options are if your commercial property policy is non-renewed.

What insurers are doing

While rates are increasing nominally in most of California’s larger cities due to higher construction costs, it’s a different story in smaller cities and towns.
Insurers are responding. Some are pulling out of the state or ceasing to write policies in areas they deem high risk and are issuing non-renewal notices. Those that continue to write business in high-risk areas are taking steps to rein in their risk:
Increasing rates – Many carriers have more than doubled rates for at-risk properties.
Hiking deductibles – Many carriers are raising deductibles in wildfire-prone areas.
Stricter terms – Some insurers are limiting the amount they will pay out if a building is destroyed. That can sometimes be as low as 20% of the value, meaning the rest would have to be covered out of pocket by the property owner.

Protective measures insurers may require

Defensible space: Maintain a defensible space around your building, usually all the way to the property line. You can find a thorough description of how to create a defensible space here.
Non-combustible materials and other measures: Use only non-combustible building materials, such as fire-proof shingles for your roof. The insurer may require you to shore up roofs, gutters, vents and siding and ensure there are no gaps that would allow embers to penetrate.
They may require exterior wall cladding made of non-combustible siding materials.
Reliable water supply: Insurers are requiring property owners to have clear access to a reliable water supply, including proximity to public hydrants and the possible installation of private-site yard hydrants. The availability of a reliable water supply is critical and should be evaluated frequently.
You may also consider installing a back-up water supply, such as a fire pump and tank.
Routine clearing: Insurers are requiring property owners to have a routine property clearing regimen that includes regularly removing dried vegetation from the property and removing debris or other flammable materials. Debris and vegetation are the tinder for large fires.

Your options if canceled

If you’ve been cancelled by your insurer, we can mount a search for replacement coverage. If all California licensed insurers that we have access to
reject your policy, we have two choices:
The non-admitted market – These are insurers that are not licensed in the state of California, but they are viable insurance companies nonetheless. They can offer policies that may not cover everything a homeowner’s policy from an admitted insurer would have. Policies can often be customized for the insured.

California FAIR Plan – We can only go to the FAIR Plan if you’ve thoroughly exhausted the options available through the voluntary market and been denied coverage.
If only one admitted insurance company is willing to write your policy, no matter how steep the premium is, you cannot go to the FAIR Plan for coverage.
Not only are FAIR Plans more expensive, but they offer fewer coverage options and lower policy limits. That said, the limits have doubled in 2022 to $6.8 million per policy.

AS INFLATION drives up salaries in all sectors, the workers’ compensation wage thresholds for construction dual class codes have increased in California as of Sept. 1, 2022.
State Insurance Commissioner Ricardo Lara in July approved the recommendation by the Workers’ Compensation Insurance Rating Bureau to increase the wage thresholds for highwage workers.
The new rates apply to workers’ comp policies that incept on or after Sept. 1.
In these dual class codes, workers’ compensation rates are different for workers above and below the wage threshold.
Rates are lower for workers whose hourly pay is above the threshold as statistics have shown higher-paid workers in these fields have fewer workplace injuries than those who are paid less.
Often the difference in premium rate between the workers who fall above and below the threshold can be significant.
Opposite are the new thresholds for each class code, that are now in effect.

COMMERCIAL PROPERTY insurance rates are continuing to climb, as the segment faces a number of headwinds that have pushed claims costs to new heights.
A number of factors are affecting rates, including the frequency and severity of extreme weather claims. the cost of rebuilding, rates for commercial properties not keeping pace with claims costs, and more.
The end result has been a steady increase in property rates across the board, but businesses with operations in areas that are more susceptible to natural disasters are seeing the highest
increases.
As a business owner with commercial property, you’ve probably already seen rates increase, and you should be prepared for further rate hikes in the coming year. Here are the main drivers of these increases.

 

Mounting natural catastrophes

The number of natural catastrophes hitting the U.S. continues increasing as does the cost of those disasters, which are affecting more properties around the country.
Depending on the part of the nation a property is located it can be exposed to hurricanes, wildfires, tornadoes, hail, flooding and more.
There has also been an increase in civil unrest, which often results in property damage to businesses.
Insured property losses in the U.S. hit $74.4 billion in 2020, the second-most expensive year on record.
Also, last year set the record for the most major natural catastrophe events to hit the U.S. in a single year (22 of them).
Five of the 10 most expensive catastrophe years for the insurance industry have occurred since 2011.

 

Reconstruction costs

Reconstruction costs have skyrocketed during the past five years, averaging 5% a year, according to the Associated Builders and Contractors analysis of Bureau of Labor Statistics data.
Lumber prices rose by 73% between April 2020 and July 2021, greatly increasing rebuilding costs. On top of that, iron and steel products jumped 15% in price during the same period, and steel mill products by nearly 7%.

 

Construction labor shortage

The construction industry faces a serious labor crunch. And many firms have backlogs that stretch out more than six months.
According to the U.S. Chamber of Commerce Commercial Construction Index, this shortage is leading to real-world setbacks for contractors:

• 68% of contractors say they are asking workers to do more work.
• 56% report a challenge in meeting project schedules.
• 50% of contractors are putting in higher bids.
• Over a third (35%) report turning down work due to skilled labor shortages.

 

Property rates are inadequate

Despite the fact that rates have been increasing for the last five years, insurers are still struggling to keep up with the rapidly rising cost of claims as well as the number of claims they are seeing.
Those factors have made it difficult for the industry to peg pricing at the right level, resulting in a string of losses in property insurance for most carriers.
As the industry struggles to get back to profitability, insurers will have to continue boosting rates.

 

Reinsurance rates

A portion of the property insurance rate gains can be attributed to insurance companies dealing with higher reinsurance costs.
Insurers buy reinsurance to pass on claims costs from catastrophic events, in order to reduce their overall risk.

 

The takeaway

There are some steps that businesses can take to try to affect their premiums.
If you have an older building, you can replace your mechanical, electrical and plumbing systems with newer, code-compliant variants.
Safeguard your building against location-specific hazards (for example, creating a defensible space and using fire-resistant roofing in wildfire areas and upgraded cladding in hurricane areas).
Also, electrical fires are the number-one cause of property damage, so you should consider installing fire-protection systems such as sprinklers and fire hose cabinets.

SOME BUSINESSES are finding fewer insurers willing to write their policies for certain types of coverage that are seeing rapidly rising claims costs, particularly in liability lines as well as property insurance in areas with exposure to natural catastrophes.
When no insurers that are licensed in California are willing to write a policy, we as your agent have to go to another market made up of insurance companies that are not licensed or regulated by the state.
It’s called the surplus lines (or “non-admitted”) market, and it can be a valuable alternative for insurance buyers.
As insurers get more selective writing some risks, it’s important for you as an insurance buyer to understand this market.

Why use a non-admitted carrier?

The most well-known non-admitted insurer is Lloyd’s of London, famous for insuring insurance companies and celebrities’ or sports figures’ body parts and global sporting events. Often non-admitted insurance companies are located in other states or domiciled abroad, like Bermuda or another tax-haven country.
Unlike licensed insurance companies, non-admitted companies do not have to obtain approval from state regulators for the policy forms they use or the rates they charge.

 

 

Since they are not regulated by the state, non-admitted insurers can offer creative coverage options and they can quickly and easily introduce new types of insurance that businesses need.
Some types of policies that are standard today, such as cyber insurance and employment practices liability insurance, got their start in the non-admitted market.
State laws typically permit a broker to obtain coverage from a non-admitted insurer only if at least a few standard insurance companies refuse to offer coverage. However, most also have coverage options that are not available in the standard market.
When someone needs one of the latter coverages, no rejections from licensed companies are required. An example might be liability insurance for contractors who demolish buildings.

Risks

There are risks to purchasing insurance in the non-admitted market. Policies may provide less coverage than do standard policies, or there may be restrictions on when coverage applies. Policies should be reviewed carefully. Also, because the insurers can charge whatever they feel is appropriate, premiums can be higher than you may expect. The policies may also be exempt from state laws regarding notices of cancellation and non-renewal.
Also, in every state but one (New Jersey), non-admitted policies are not backed by a guaranty fund. Guaranty funds cover claims left unpaid when an insurer is unable to pay for them. If a non-admitted company becomes insolvent, the policyholder has no recourse.

The takeaway

Despite the risks, the non-admitted market serves an important function, giving buyers a place to get needed coverage that would be otherwise unavailable.
Those who think they may need to tap this market should consult with us to find the right coverage at an acceptable price.

INSURANCE RATES are rising rapidly for contractors, particularly for builder’s risk and excess liability policies as the cost of claims continues to increase dramatically.
While rates for builder’s risk have been averaging 10 to 20%, pricing for excess liability and umbrella coverage has in some cases doubled from the year prior.
Both lines of insurance have seen steep and unexpected losses in recent years, resulting in some insurers leaving the market and others becoming stricter in their underwriting and choosier about which builders they are willing to extend coverage to.
If you’ve been in the market for these lines of insurance, you know that it’s become more difficult to secure similar policies to those you may have had in years past. Here’s a look at what’s going on.

Builder’s risk

According to Construction Executive magazine, rates are going up between 10% and 20% for builder’s risk policies. There are a number of factors affecting rates:
• The cost of claims has increased, primarily because of the cost of rebuilding after a loss event due to the rapidly rising cost of materials, in particular lumber, the prices of which have tripled in the last year.
• The increasing cost and frequency of natural disasters. Projects that are near areas at high risk for natural catastrophes like brush fires, hurricanes, tornadoes or flooding, are all seeing higher rates and/or difficulty in securing coverage.
• Some insurers have also left the market, leaving fewer players willing to write this risk, which has driven up pricing.

Insurers are tightening eligibility guidelines and restricting how much they will cover. Some insurers are getting more selective and demanding that their insureds take extra precautions before they are willing to bind a policy.

Some of the more common demands include requiring:
• Video surveillance systems on worksites.
• Guards to patrol worksites at night.
• The installation of fencing and lighting.

One of the biggest pinch points is policy extensions, which are needed when projects go beyond the time expected to complete them.

Due to the issues mentioned in the bullet points above, policy extensions for ongoing projects have been difficult to secure, according to a report by WillisTowersWatson. The problem has been exacerbated by the COVID-19 pandemic, which disrupted many construction projects across the country and required more companies to seek out extensions for their builder’s risk policies.

Excess liability

Renewals for excess liability and umbrella insurance have been running 50 to 100% higher than in 2020, according to a recent report by Marsh LLC. Excess liability and umbrella coverage kick in after a claim breaches the limits of a primary general liability policy or auto liability.

The drivers: Increasingly large jury awards and the spiraling cost of liability claims, particularly for commercial vehicle accidents. Commercial auto insurance rates have also been climbing as the cost of auto injury and property claims continue to rise due to the increasing cost of repairs and medical costs for injured third parties…

Those claims are covered by primary auto and general liability insurers, but because more claims are exceeding limits, excess liability carriers are increasingly on the hook for those high-dollar claims. Like in the builder’s risk segment, this has resulted in fewer insurers willing to write new policies.

Those that are willing to write new business or renew policies have imposed stricter underwriting terms on the policies they are willing to accept.
Additionally, according to Marsh, primary and excess insurers are limiting the overall capacity extended to an individual buyer by capping per-project aggregate limits.

The takeaway

With the volatility in the marketplace, we recommend that you reach out to us early – and months before your policy is coming up for renewal – so we can work with you to make sure we can secure the coverage you need.