Since 2017, the commercial property insurance market has demonstrated persistent premium increases. Although there were indications of rate moderation in 2022, predominantly within single digits, it proved temporary. Industry data shows a substantial surge in Q1 2023 premiums at an average 20.4% increase. This marks the first time in two decades that the segment experienced average rate hikes above 20%. The latter half of 2023 sustained this upward trend, registering the highest average premium increases of commercial coverage at 18.3%.
Current market challenges can be attributed to a combination of factors including an intense natural disaster season, inflationary pressures and a volatile property valuation landscape. The resulting losses have compelled commercial property insurance carriers to consistently raise policyholder premiums and implement more restrictive coverage terms. Insureds conducting high-risk operations, with inadequate property management practices or located in disaster-prone areas should anticipate ongoing rate hikes and coverage limitations.
Trends Shaping Commercial Property Insurance
Addressing Climate Challenges
The commercial property market faces a formidable challenge from the escalating frequency and severity of extreme weather events. Bloomberg Intelligence reports that 2023’s global insured losses from natural disasters will surpass $100 billion for the fourth consecutive year. The U.S. alone experienced a record number of billion-dollar weather and climate events, incurring costs exceeding $57 billion.
Severe convective storms (e.g., thunderstorms, tornadoes, hailstorms) accounted for 68% of all weather-related losses in the first half of 2023, resulting in a financial impact of $35 billion. Climate experts predict that ongoing natural disaster patterns will further amplify the adverse impact on future commercial property losses.
Inflation-Driven Premiums
The surge in inflation has contributed to heightened commercial property premiums and increased claims expenses. While inflationary pressures have subsided since peaking in 2021, building material costs show no signs of decelerating. Notably, there was a substantial increase in building material prices in 2023, exceeding 10%, particularly in wood and steel expenses (over 15%). Further, the construction industry experienced notable wage growth, with an annual rate of 4.4%, compared to 3.6% in 2019. As inflation continues into 2024, businesses may encounter potential underinsurance concerns. Outdated property valuations could cause reduced claim payouts and coinsurance penalties, ultimately leading to larger out-of-pocket expenses. Reinsurance Capacity Concerns
Prioritizing Accurate Property Valuations
Amid highly volatile building material prices, accurate property valuations assume a crucial role. Insurance professionals stress the importance of meticulous insurance-to-value (ITV) calculations to ensure adequate coverage. Recent industry research reveals significant inaccuracies in many ITV calculations, with coverage gaps exceeding 30%. To mitigate these inconsistencies and ensure sufficient coverage, organizations are advised to leverage the replacement value of the property. This involves estimating the current cost to replace or rebuild a property, considering factors such as material and labor expenses, architectural services, debris removal and building permits. Employing methods like property appraisals, adjusted fixed-asset records or basic benchmarking tools can assist in achieving more precise calculations.
Strategic Tips for Commercial Property Insurance Buyers
- Continuous Maintenance: Keep your commercial property in optimal condition by promptly addressing any building issues. This helps prevent insurance claims, demonstrating a commitment to proactive property management and risk mitigation.
- Controlled Disaster Exposure: Evaluate natural disaster exposures specific to your organization’s commercial properties. Implement mitigation and response measures to protect your property should an event occur (e.g., install storm shutters, utilize fire-resistant roofing).
- Precise Property Limits: Review and adjust your organization’s commercial property limits to avoid underinsurance and coinsurance penalties. This involves updating total insurable values and conducting accurate ITV calculations.
We’re Here to Help Prevent Commercial Property Exposures
Experts predict a 5% to 25% increase in commercial property insurance premiums in 2024. Our team is here to help you understand the current commercial property insurance market, empowering you with risk management strategies to protect your organization. If you have more questions about your commercial property insurance coverage or the status of the market, connect with a member of our team.
© Copyright CBIZ, Inc. All rights reserved. Use of the material contained herein without the express written consent of the firms is prohibited by law. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein. Material contained in this publication is informational and promotional in nature and not intended to be specific financial, tax or consulting advice. Readers are advised to seek professional consultation regarding circumstances affecting their organization.
“CBIZ” is the brand name under which CBIZ CPAs P.C. and CBIZ, Inc. and its subsidiaries, including CBIZ Advisors, LLC, provide professional services. CBIZ CPAs P.C. and CBIZ, Inc. (and its subsidiaries) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations, and professional standards. CBIZ CPAs P.C. is a licensed independent CPA firm that provides attest services to its clients. CBIZ, Inc. and its subsidiary entities provide tax, advisory, and consulting services to their clients. CBIZ, Inc. and its subsidiary entities are not licensed CPA firms and, therefore, cannot provide attest services.