The commercial property insurance market remains a challenging landscape, with various factors contributing to the rise in premiums for coverage on commercial properties.
Here, we outline the key drivers behind the increasing costs:
1. Catastrophic Events
Hurricanes, floods, wildfires, tornadoes, and winter storms have continued to exert significant pressure on the industry due to their frequency and severity. Over the past six years, these events have led to annual insured losses exceeding $100 billion globally for five of those years. In the previous year, the total insured losses worldwide reached an astonishing $140 billion.
2. Reinsurance
Catastrophic events play a pivotal role in the escalating expenses associated with reinsurance, which primary carriers are compelled to pass on to their customers. Simultaneously, factors such as inflation and the economic climate have made reinsurers more discerning. In early 2023, the disparity between reinsurance supply and demand was estimated at $60 billion, a threefold increase compared to the previous fall.
3. Underinsurance
Recent inflation has driven up the costs of materials and services significantly. However, a mere 43% of business owners have adjusted their policy limits to accurately reflect the actual replacement value of their insured property. It is crucial for customers to assess the precise valuations of their assets to avoid being underinsured in the event of a loss, with corresponding premium adjustments to account for higher asset values.
4. Rising Property Replacement Costs
Construction costs have experienced notable increases, with a 55% surge in structural steel prices and a 35% rise in lumber costs over the past three years. Nonresidential construction costs have risen by 36%, while multifamily residential construction costs have seen a 32% increase during the same period. Additionally, machinery and equipment expenses have gone up by 18%. Many contractors continue to grapple with material shortages and disruptions in the supply chain.
5. Shortage of Skilled Labor
Almost half of reconstruction costs are attributed to wages and salaries, which have seen a 16% increase over the past three years. Despite higher wages, nine out of ten contractors are struggling to find skilled labor, leading to project delays. The higher rebuilding costs and prolonged delays may result in increased business interruption losses.
6. Adjusting Property Rates
For years, escalating loss trends have outstripped rate increases, primarily due to the costs associated with catastrophes, extreme weather events, and large-scale fires. As a result, carriers are expected to raise rates once more this year to bridge the gap.