Navigating an unsettled CRE insurance market

Commercial Real Estate

While the rising cost of capital and today’s economic headwinds may garner all the attention, commercial real estate owners are discovering a new pain point that’s absorbing their time and threatening their margins—property insurance. The cost of coverage has risen sharply in many markets and skyrocketed in others. Many are seeing 30% to 100% increases, while it’s also become more difficult to attract insurers’ interest in proposing and underwriting coverage for commercial properties.

The reset in commercial insurance availability and costs has commercial property builders and owners asking what’s changed, why, and how they can secure cost-effective property risk coverage in this market.

Unprecedented pressure on insurer pricing

Under pressure from sharply rising replacement costs, property valuations in most commercial real estate sectors have jumped recently. Supply chain disruptions, labor market tightness, and overall inflation have pushed construction costs to new heights, and naturally, the costs for insuring those properties have followed.

It’s not just higher valuations driving up rates, but also the combined effect of major losses from natural catastrophes plus a greater frequency of other losses like fires, water damage after freezes, and flooding, particularly in the multi-family space. Pinched margins at carriers, resulting from escalated losses and the need to boost reserves to cover future events, are catalysts for the significant pricing corrections.

Additional margin pressure on insurers comes from rising interest rates. Insurance companies are long-term investors, and as interest rates have increased, their longer-term bonds and investments  have underperformed. At a time when insurers are looking for more capital to cover increasingly valuable properties with higher potential losses, they are finding less and more expensive capital.

For property owners, insurance repricing comes in several different forms. Carriers can adjust pricing by boosting rates or requiring higher deductions. They can also be more stringent about having coverage match updated property valuations while tightening blanket limit restrictions. Together, these tactics drive the total cost of insuring property higher in today’s market.

New fundamentals have reduced availability and increased costs.

For commercial property owners, coverage has become harder to obtain at any cost, leaving many scrambling to piece together coverage from multiple carriers for properties handled previously by a single insurer.

At a tactical level, insurers are repricing coverage and passing on riskier business to strengthen margins—weak business returns have been the catalyst for newfound pricing discipline. At a more strategic level, insurers are reducing the total risk coverage they are willing to accept in the commercial real estate space.

The sustained, heavy losses from catastrophic events and disasters in the U.S. prompted insurers to pull back significantly from the commercial real estate market, with some carriers completely exiting higher-risk markets, such as California, New Orleans, Houston, Florida, and other parts of the South and Southeast. Florida has been especially hard hit by this insurance coverage shortage, feeling the effects of Hurricane Ian (2022), Hurricane Michael (2018), and Hurricane Irma (2017) that collectively caused more than $180 billion in estimated storm damages in the U.S., mostly in the Sunshine State.Disclosure 1

Reinsurers pull back. 

Reinsurance companies have also suffered from the large volume of property claims over the past few years. They have hardened their pricing to reduce their dollar exposure in the commercial real estate market. Roughly $46 billion in capital moved out of the reinsurance market between 2021 and 2022.Disclosure 2

Reinsurance companies provide insurance to insurance companies, sharing the financial risk of covering potential claims and contributing to commercial property insurance carrier pricing. Reinsurers have significantly reduced the amount of capital they are willing to commit for commercial property coverage and raised their premiums in line with recent losses seen in commercial property. In January 2023, global property catastrophe reinsurance rates increased by 37 percent.Disclosure 3 Much of that increase is factored into the insurance premiums for builders and property owners, and the shortage of capital can make it a challenge to find the full amount of coverage you need.

Commercial property risk protection is shrinking in today’s market, with reinsurers commonly using the term “double half” to describe the current reinsurance environment—doubling the attachment point to shoulder only half the dollar amount of risk relative to previous reinsurance offerings.

What is “attachment point”?

In insurance, attachment point refers to the dollar amount of financial risk the insurance carrier takes on. A reinsurer is responsible for the risk that’s left after accounting for the insurer’s attachment point. The double half trend means that, for example:

  • In 2017, a reinsurer might have been willing to take on slightly more than half of the risk for a condo development worth $250 million, providing perhaps $150 million of reinsurance while the insurance carrier took on the other $100 million of risk.
  •  In 2023, that reinsurer may only be willing to take on $75 million of risk for the same development, leaving the insurance carrier having to cover the remaining $175 million.

Dealing with higher insurance cost in a stressed market

As if higher costs and the shortage of coverage in the property insurance and builder’s risk insurance market weren’t disruptive enough, lower occupancy rates in some sectors leave fewer tenants to absorb the impact of the increases. Property owners often feel the squeeze where prevailing market rates limit potential rent increases that could offset the higher costs of insurance. In the brittle office sector, significantly higher insurance costs add yet another factor that, along with shifts towards remote work, can cause office tenants to look for ways to reduce total occupancy, further decreasing expense reimbursements to the landlord.

Further, the inflated costs and reduced insurance availability can leave fewer insurance dollars to protect your assets from other potential threats like cybersecurity and criminal acts. In today's market, it's easy for commercial property owners to fall into the trap of being so focused on property insurance that they lose sight of other risks to their business and property 

A strategy to finding property coverage

Securing commercial property coverage in today’s market may require a more involved and lengthier initial application or renewal process than property owners are used to.

  1. Start your renewal process early. Simply resubmitting last year’s application at renewal time is unlikely to be enough to secure the coverage you need. In this volatile environment, insurers have renewed their focus on accurate property assessments to better gauge their exposure. Depending on your state and region, that can mean everything from inspections and appraisals to structural integrity reports and risk prevention programs. To avoid gaps in coverage, you’ll want to start the process at least three to four months in advance of the date you need coverage to begin.
  2. Find an advisor you can trust. With soaring pricing and tight capacity, the right commercial property insurance partner can offer the advantage you need. Whether you engage a consultant or partner with an insurance broker, you want to make sure you have someone who will represent your best interests to secure the best coverage and rates from insurance carriers.

    The conditions in today’s market put a premium on commercial property insurance experience and insight to find the ideal balance of coverage and cost. If you want the application and renewal process to go smoothly while overcoming any potential barriers to coverage, brokers or consultants who know how to work with carriers, lenders, and bankers to meet their needs can eliminate the risk of conflicting requests and assessments that make it difficult to obtain coverage on a particular property.

  3. Do the technical work to find ways to reduce risk. Coverage in today’s tight market will come with more technical requirements and risk reduction requirements. Engage OSHA-certified risk managers, risk engineers, and building engineers directly or through your broker to give you a better understanding of what you’ll face in the insurance buying process and help you implement the programs insurance carriers will require to mitigate risks. 

  4. Take a comprehensive approach to risk management. While property coverage may be the pain point, don’t let it distract you from taking a more comprehensive approach to risk management. As you spend more time on insurance this year, use this opportunity for your advisors or broker to conduct a more extensive risk analysis across your entire operation. A fresh perspective can help identify and remedy any gaps in coverage to better protect your investment.

Prepare for a more thorough renewal process for commercial property insurance.

Obtaining the right commercial property insurance will take more of your time and energy this year, in addition to costing you more. Talk to a Truist relationship manager about ways Truist and McGriff Insurance Services can help you in today’s challenging commercial property insurance market.