Why Commercial Property Insurance Costs are Skyrocketing

The cost of?commercial property insurance?continues to be challenging. Below are six factors contributing to premium increases for commercial property coverage.

1. Catastrophic Losses

Bigger and badder storms are driving catastrophic losses across the country. In Texas, the costs from winter storm Uri have been the final straw for many insurance companies who are now leaving the state.

At the heart of this is reinsurance companies. These are insurance companies that insure insurance companies. Specifically, they offer protection for insurance companies from huge catastrophic events. Reinsurance companies have seen huge losses and are charging higher premiums. This gets passed on to property owners.

DATA POINTS:

Over the past ?ve years, there have been 86 events with losses exceeding?$1 billion?each in the United States. In 2021, there were 20 such events, preceded by 22 events in 2020, which set a new annual record.?The total insured losses from global natural disasters totaled?$130 billion?in 2021, with the United States accounting for?$92 billion.

2. Property Replacement Costs

No one is surprised to hear that it costs more to build property that it did before. In fact, the cost of construction has increased?28% over the last five years. In 2021, total nonresidential reconstruction costs increased?16.5%.

Where does the increase come from?

DATA POINTS:

Materials increases are led by a?51% increase in structural steel and a?22.7% increase in the cost of lumber. Similarly, machinery and equipment replacement costs have increased?8.5% over the same time frame.

Then there's labor. Construction project delays and material shortages brought on by the pandemic, coupled with supply chain breakdowns and the ongoing shortage of skilled workers, are increasing the amount of time and money it takes to rebuild. A recent survey from the Associated General Contractors of America found that?89% of contractor respondents reported difficulty in filling positions.

Having the right insurance coverage limits to meet rising replacement costs is vital in case a business suffers a loss. Of course, increasing replacement cost on insurance policies leads to increased premium paid.

4. Increased Rate Charged

Coming in fourth is the thing you think of most, insurance companies simply increasing what they charge. This is called 'rate". Rate is based on insurance actuaries modeling out the claims they believe will be paid and how much premium they need to collect to cover it. The goal is not to lose money. For commercial property, that has been a tough goal to achieve. Insurance companies are still running big losses on property and so rates continue to increase.

5. Underinsurance

An estimated?75% of commercial businesses are underinsured by an average of?40% or more. With the cost of building materials and labor increasing at unprecedented rates the gap between what the coverage property owners should have and what they do have is growing. This may not seem like a factor making insurance more expensive but insurance actuaries figure rates based on property being properly insured. This level of underinsuring means not enough premium comes in. They leads to rates needing to go up.

6. Roof Claims

Insurance coverage is meant to make you whole after a loss. But many property owners push that definition towards an attempt to mitigate large capital expenses. Roofs are #1 on that list. As roofs get older, property owners see millions in costs to replace. So they turn to insurance. Many roofers have become good as disguising age as storm damage to push costs over the the insurance side. The result in increased insurance costs for everyone.

Bottom Line

Having an advisor who understands the commercial real estate insurance market is more important now than ever. Insurance companies are more picky than they've ever been. Choosing an advisor who has the relationships and can get the best companies to say "yes" is the #1 key to finding quality coverage for the best price.

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