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.

MORE BUSINESSES in wildfire-prone areas are facing a difficult commercial property insurance market as insurers reduce their exposure and some have left the market altogether.

Many businesses in areas that have already been ravaged by fires in the past, or those located in areas that are near forests and large grassy areas are seeing their premiums increase – sometimes substantially by 300% or 400%.
Also, more businesses are finding few insurers that are willing to cover their properties.

According to a new report by insurance rating firm AM Best, California wildfires have caused over $4 billion in commercial property losses for insurers in three of the past four years.

It’s expected that 2021 fire losses could be even greater than those of the prior four years.

The fallout

• Some insurers have stopped writing property insurance in high-risk areas.
• Most insurers are increasing their rates substantially in high-risk areas.
• Insurers are requiring policyholders to have mitigation measures like defensible space (see below).
• Many policies have worse terms. One winery owner interviewed by the Los  Angeles Times said that his premium was typically $200,000 with a $25,000 deductible. His new policy costs $800,000 and includes a $500,000  deductible, and would only cover 20% of the value of his buildings.

The new playbook

Many insurers are applying three metrics in evaluating exposure to fire:
Brush mapping – This is a map of the tinder and brush, nearby trees, and other items that could contribute to your building(s) catching fire.
Wildland-urban interface – The closer that a building is to nature, the more at risk it is. A wildland-urban interface is defined by the Forest Services as a place where “humans and their development meet or intermix with wildland fuel.”
Concentration of properties an insurer covers in your area – If your carrier has a high concentration of policies for other properties in your area, they may opt to non-renew policies in order to reduce their exposure.

 

 

 

 

 

 

PROTECTING YOUR COMMERCIAL PROPERTY

• Zone 1 (0-5 feet): Concrete, gravel mulch, and low-growing plants or lawns are good choices for this zone. Avoid combustible materials.
• Zone 2 (5-30 feet): Vegetation island. Prune low tree branches. Remove shrubs.
• Zone 3 (30-100 feet): Thin out vegetation between trees. Don’t let tree canopies touch.

The California FAIR Plan Is the Market of Last Resort 

Coverage options

If all insurers have rejected a property, we have two options:

– The non-admitted market – These insurers, which include Lloyd’s of London, are usually willing to write buildings in higher-risk areas, but they too have increased their underwriting criteria.

– The California FAIR Plan – If we cannot find an insurer in the non-admitted market, the last choice is the FAIR Plan, which is the market of last resort for property owners that cannot get coverage elsewhere.

Policies cover losses from fire, lightning, and explosion only.
Also, policies are limited in what they will payout, so if you have millions of dollars tied up in equipment and/or inventory, the policy may not be enough to cover all the damage you incur from a wildfire.

The maximum limit for commercial properties is $3 million for structures and $1.5 million for all other coverages, for a combined $4.5 million limit for all commercial properties at one location. But there are some exceptions.

Your options if you go to the FAIR Plan

If the FAIR Plan coverage is not enough for your needs, we can find another insurer that provides excess coverage that
would kick in at a certain dollar amount of damage.

And for risks that are not covered, we would have to also find you a “differences in conditions” policy. Combined with FAIR Plan coverage, adding such a policy can nearly mimic the coverage of a commercial policy.

 

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.

A NEW report highlights the risks to commercial real estate owners from natural catastrophes and climate-related disasters, which are happening with increasing frequency. The report by Heitman LLC, a global real estate company, in conjunction with the Urban Land Institute, found that the increasing risks from catastrophes are bringing new challenges to commercial property owners in terms of risk mitigation and securing appropriate property coverage, which may become more difficult in the future.

There are two main risks facing commercial property owners: physical and transitional risks associated with increasingly volatile weather.

Physical risks – This includes catastrophes, which can lead to:

• Increased insurance premiums
• Higher capital outlays
• Increased operational costs
• Decreased liquidity
• Falling value of buildings

Transitional risks – This includes economic, political and societal responses to climate change and more volatile weather that can make entire regions or metropolitan areas less appealing due to increasing weather events.

Fallout from extreme events

• Costs to repair or replace damaged or destroyed property.

• Property downtime and business disruption.

• Potential for increased insurance costs or reduced/no insurance availability

 

The report notes that commercial property owners in areas that have seen regular catastrophes have started seeing either higher premiums for their property policies or decreased coverage.

 

Main impacts facing property owners

First, there are catastrophic events, like extreme weather such as hurricanes and wildfires. Gradual changes in temperature and precipitation – such as higher temperatures, rising sea levels, increasing frequency of heavy rain and wind, and decreased rainfall – are likely to exaggerate the impact of catastrophic events.
This can affect commercial properties in the form of:

• Increased wear and tear on or damage to buildings, leading to higher maintenance costs.
• Increased operating costs due to the need for more, or alternative, resources (energy and/or water) to operate a building.
• Cost of investment in adaptation measures, such as elevating buildings or incorporating additional cooling methods.
• Potential for more damages from weather events.
• Higher insurance costs or lack of availability.

 

What owners are doing

Survey respondents said that they currently use insurance as their primary means of protection against extreme weather and climate events. But 70% of real estate and hospitality industry managers said they had seen an increase in rates in the year to the end of the third quarter of 2018, with an average rise of 9.1%.

While insurance will cover damages from catastrophic events, it will not cover loss in value if investors start shying away from an area due to vulnerability to natural catastrophes. Although insurance might provide short-term protection, more property owners and investors are looking for better tools and common standards to help the industry get better at pricing in climate risk in the future.

These include:
• Mapping risk for the properties they currently own.
• Reviewing climate risk and catastrophe susceptibility before purchasing new properties.
• Using mitigation measures around their properties.
• Working with local policymakers to support investment by cities in mitigating risk.

A new report highlights the risks to commercial real estate owners from natural catastrophes and climate-related disasters, which are happening with increasing
frequency.

The report by Heitman LLC, a global real estate company, in conjunction with the Urban Land Institute, found that the increasing risks from catastrophes are bringing new challenges to commercial property owners in terms of risk mitigation and securing appropriate property coverage, which may become more difficult in the future.

There are two main risks facing commercial property owners: physical and transitional risks associated with increasingly volatile weather.

Physical risks – This includes catastrophes, which can lead to:

• Increased insurance premiums
• Higher capital outlays
• Increased operational costs
• Decreased liquidity
• Falling value of buildingsTransitional risks – This includes economic, political and societal responses to climate change and more volatile weather that can make entire regions or metropolitan areas less appealing due to increasing weather events.

The report notes that commercial property owners in areas that have seen regular catastrophes have started seeing either higher premiums for their property policies or decreased coverage.

MAIN IMPACTS FACING PROPERTY OWNERS

First, there are catastrophic events, like extreme weather such as hurricanes and wildfires. Gradual changes in temperature and precipitation – such as higher temperatures, rising sea levels, increasing frequency of heavy rain and wind, and decreased rainfall – are likely to exaggerate the impact of catastrophic events.
This can affect commercial properties in the form of:

• Increased wear and tear on or damage to buildings, leading to higher maintenance costs.
• Increased operating costs due to the need for more, or alternative, resources (energy and/or water) to operate a building.
• Cost of investment in adaptation measures, such as elevating buildings or incorporating additional cooling methods.
• Potential for more damages from weather events.
• Higher insurance costs or lack of availability.

WHAT OWNERS ARE DOING

Survey respondents said that they currently use
insurance as their primary means of protection against
extreme weather and climate events.

But 70% of real estate and hospitality industry managers
said they had seen an increase in rates in the year to the
end of the third quarter of 2018, with an average rise of
9.1%.

While insurance will cover damages from catastrophic
events, it will not cover loss in value if investors start
shying away from an area due to vulnerability to natural
catastrophes.

Although insurance might provide short-term
protection, more property owners and investors are
looking for better tools and common standards to help the
industry get better at pricing in climate risk in the future.

These include:

•  Mapping risk for the properties they currently own.
• Reviewing climate risk and catastrophe susceptibility before purchasing new properties.
• Using mitigation measures around their properties.
• Working with local policymakers to support investment by cities in mitigating risk.