From inflation to a looming recession, the cost of living continues to spike. Real estate and commercial property insurance are among the areas you can expect to see rates go up in the next year, and experts are predicting that 2023 will see an even more disruptive market. Though increases in rates may be inevitable, understanding the factors that cause them may help you save on your insurance premiums.
Factors That Have Led to Cost Increases
Around July 2022, at mid-year renewals, some high-risk properties experienced an average increase of 20%. Inflation has certainly been a factor in the costs of all insurance premiums, but there are many other factors that lead to spikes in commercial real estate insurance.
A primary cause for the significant rate increase has been the rise of severe natural disasters across the United States. States like Florida, California, Texas, and Louisiana were already considered to be high-risk states, but over the past few years have experienced an unparalleled amount of severe storms. Eight out of the 10 years with the highest number of natural disasters occurred in the last decade. In 2021 alone, the US experienced 20 weather-related events with losses exceeding $1 billion each. These storms aren’t isolated to high-risk states anymore, either. Many coastal towns on the east coast are now at higher risk of flooding and total loss. Since insurance rates are determined based on the potential risk and actual losses of the year prior, as weather-related damage increases, so will the cost to insure them.
Rising Costs of Materials and Labor
The pandemic, volatile labor market, and inflation have all led to a significant increase in materials and labor costs. Insurance premiums are partially dependent on the cost to replace or repair your property. Building materials have increased an average of 20- 30% from 2020, meaning in the event of a loss, it would cost the insurance carrier 20-30% more to indemnify you.
Based on statistics provided by the Associated General Contractors of America, the following are just some of the property construction factors that have seen the steepest increase in costs in the past few years:
- Non - Residential Construction (21% increase)
- Concrete Contractors (18% increase)
- Asphalt (37% increase)
- Sheet Metal (35% increase)
- Stainless Steel (46% increase)
- Plastic Construction Materials (31% increase)
- Construction Wages and Salary (4% increase)
There has been both an increase in demand for commercial property construction and a decrease in labor workers. This combined with other factors like supply chain disruption has caused an overall cost increase for building, renovation, and repairs for commercial property and real estate.
Reinsurance Losses Driving Insurance Premiums
Reinsurance is where an insurance provider will assume another insurance company's risk portfolio in order to effort balance the insurance market, and decrease the financial risk of each individual carrier. Reinsurance is common practice, and very prevalent within the commercial real estate industry due to the high financial costs associated with coverage. Hurricane Ian was just one of many detrimental events that have driven mass losses within the reinsurance market, causing concern for many providers. In the assumption that these risks will only increase with global warming and the volatile economy, reinsurance rates will continue to increase. In fact, property catastrophe reinsurance rates in the U.S. have risen by almost 15% in 2022, according to the Guy Carpenter U.S. Property Catastrophe Rate on Line Index. This is the largest increase since 2006.
There is a large concern for primary providers that they will lose access to the risk transfer with reinsurance companies and they continue to withdraw from the market, and significantly increase their rates. As a result, primary insurance carriers plan to increase their rates in order to protect themselves financially.
What Can You Do to Keep Premium Increases at a Minimum?
There may be no avoiding increases, but there are certainly ways to keep your costs at a minimum for your commercial property insurance. Consider the following initiatives to decrease your premiums in the year ahead.
Ensure Your Property Is Following Proper Preventative Measures
Many insurance carriers will offer discounts for properties that are taking the proper precautions to avoid losses. This can include factors like having proper fire alarms, smoke detectors, and security devices. Also, make sure you have regular inspections to ensure you are up to code.
Build With Less Expensive Materials
While it may be tempting to use the most expensive building materials for your new property or renovation, that may not be the best financial decision. Not only will it cost you more to build, but it will cost you more to insure the property as a result. Many lower-end materials can provide just as secure of a structure, for a lesser price. Talk to your construction team about utilizing more cost-effective materials where possible.
Increase your Deductible
Increasing your deductible can help you save money on your insurance. By increasing your deductible, you are assuming more of the risk. Most carriers offer lower premium plans for higher deductible options.
Bundle Your Coverage
Bundling your property insurance coverages with your other insurance coverages through the same carrier can help you save money. Most carriers offer discounts for insureds who carry a larger insurance program overall. It's best to shop around and see what offers and discounts carriers will provide you, so make sure you compare rates before making a final decision.
Secure Your Commercial Property Insurance with ECBM
Whether you need to secure commercial property insurance, or you want to review your program and update your coverage, ECBM is here to help. We have access to top providers and competitive programs, such as multi-year rate locks and up to 35% price reduction. As rates continue to rise, our team is ready to help you get the best coverage at the best price. To learn more, contact one of our agents.