How Weather and Inflation Drive Up Insurance Rates, and Strategies to Manage the Rising Costs and Risk
Weather has always been an influencing factor in the world of commercial property insurance, but the dramatic increase in severe weather events, combined with current economic conditions, creates an unusually stormy situation in which one issue looms large: the dramatic rise in the cost of commercial real estate insurance.
In these conditions, it can be a challenge for commercial property owners, developers, and other real estate professionals to control insurance costs and liability while effectively protecting their assets. We’ve seen many fluctuations in the real estate market during our 60+ years as insurance advisors to the community. Based on current research and historic perspective, the ICC team is sharing insights in this article on the causes and consequences of the sharp rise in commercial property insurance rates, strategic tips to help control costs and manage risk, plus predictions to help commercial real estate owners stay prepared and protected in 2024.
PART 1: The Causes and Consequences of Rising Commercial Property Insurance Costs
Natural Disasters and Severe Storms
A main factor contributing to the surge in commercial property insurance costs is the increasing frequency and severity of natural disasters. According to a 2023 Insurance Business Magazine article, commercial property insurance costs are up by an average of 33% year over year. Hurricanes, wildfires, and floods have become more devastating, inflicting substantial damage on commercial properties.
As the severity of storms grows fiercer, insurance companies find themselves navigating treacherous waters. They are forced to pay out more frequently and in larger sums, which ultimately leads to increased premiums for commercial property owners. Additionally, insurers are becoming more selective, scrutinizing properties’ vulnerability to weather related risks before agreeing to offer coverage. This means that properties in high-risk areas may face steep increases in property insurance costs or even struggle to secure coverage at all.
Inflation and Shrinking Reinsurance Market
Another critical factor driving up insurance costs is the global issue of inflation, which has been on the rise in 2023. Inflation puts upward pressure on construction and replacement costs. When property values increase, insurance coverage limits must also rise, contributing to higher premiums.
Moreover, the shrinking reinsurance market acts as a relentless undertow. Reinsurers, who help insurers manage their risk portfolios, are becoming more cautious due to the increasing frequency and severity of natural disasters. Reinsurers have significantly reduced their capacity for property coverage which has led to higher costs and increased restrictions in coverage. These expenses are then passed onto their policyholders, causing a surge in commercial property insurance costs.
The unfortunate consequences of these economic factors are felt acutely by commercial property owners and developers. Rising premiums can eat into profits and make investments less appealing, leading to potential stagnation in the industry.
PART 2: Strategic Ways to Protect Your Property and Interests
In the face of these challenging conditions, there are proactive steps property owners can take to reduce the financial impact of rising insurance rates. Following are strategic solutions from the ICC team that target your ability to control insurance costs and mitigate risk in today’s tumultuous marketplace:
Risk Mitigation and Property Upgrades
One proactive approach is to invest in risk mitigation strategies and property upgrades. Conduct a risk analysis to Identify vulnerable aspects of your properties and take steps to fortify them against weather-related threats. By demonstrating foresight and a commitment to resilience, you can negotiate better insurance terms with Carriers.
Insurance Shopping and Comparison
Do not settle for the first insurance quote that crosses your desk. In the face of rising costs, it’s crucial to partner with an advisor who maintains strong relationships with multiple carriers. At ICC, this gives clients a distinct negotiating advantage and enables us to shop around and compare policies from different insurers, providing tailored coverage with the most favorable terms and rates. Our deep understanding of the nuances of the New York market is a further advantage for commercial property owners in the area.
Risk Management Plans
Develop comprehensive risk management and response plans for your properties. Highlight your commitment to safety and disaster preparedness in your insurance applications. Insurers are more likely to offer competitive rates to clients who demonstrate a proactive approach to risk management.
Expert Support
For many commercial property owners, retaining a professional insurance advisor is not a luxury, it’s a mandatory safeguard for effectively protecting their people, property, and profitability. The evolving complexities of insurance coverage, limits, compliance, liability, etc., make it imperative to consult with professionals who have expertise in commercial insurance and risk management. As local advisors with a deep understanding of the New York commercial property market and the unique factors that impact insurance costs, ICC serves as a highly experienced partner who advocates on your behalf to secure the best possible coverage at the most competitive rates.
FINAL THOUGHTS: Predictions for 2024
It is critical to remain informed and proactive in the coming year. The rising insurance rates and tight coverage restrictions we’re experiencing are expected to continue in 2024. Commercial property owners should prepare for higher utility costs, higher construction and labor costs, and higher costs for equipment and services. They should also keep a close watch on the constantly changing real estate laws and regulations to ensure compliance and avoid financial exposure.
The potential for sharp increases in commercial property rates in 2024 presents a formidable challenge for property owners. However, with a proactive approach that includes risk mitigation, and support from skilled advisors, you can position yourself strategically in the face of these challenges. The road ahead may be uncertain, but with the right guidance and preparation, you can weather the storm and continue to thrive.
SOURCES:
Time Magazine, August 2023, https://time.com/6306005/climate-change-insurance-costs-commercial-real-estate/
Program Business, September 2023, https://programbusiness.com/news/commercial-real-estates-next-big-headache-spiraling-insurance-costs/
Wall Street Journal, September 2023, https://www.wsj.com/real-estate/commercial/commercial-real-estates-next-big-headache-spiraling-insurance-costs-604efe4d
Insurance Business Magazine, September 2023, https://www.insurancebusinessmag.com/us/news/property/why-are-commercial-real-estate-rates-seeing-yearoveryear-increases-460037.aspx
