NYC Insurance Blog

6 Reasons Why Commercial Property Premiums Are on The Rise

Landlords and property owners are facing an insurance problem. Commercial property premiums are rising, and there are no signs of stopping any time soon. Recent statistics have shown that rising inflation and several other factors have made property insurance premiums skyrocket to a record high. Therefore, why are premiums continuing to increase, and what can we do about it?

Higher reinsurance costs

Insurance companies tend to buy coverage from other insurers to share risks. It is a prudent approach because insurers reduce the risk of financial loss in the event of a disaster. However, inflation and frequent losses have affected the reinsurance costs. The reinsurance costs have increased, affecting commercial property owners and landlords. Remember, when the reinsurance costs increase, the extra costs are transferred to the consumers increasing premium costs. 

Catastrophic losses

Major catastrophes over the past few years have increased reinsurance costs. In recent years especially in 2017 and 2021, there have been numerous severe catastrophes, including Category 4 hurricanes, wildfires, winter storms, hail, floods, and tornadoes. With more than frequent hurricanes costing insurers billions of dollars, catastrophic losses have negatively affected the cost of property premiums. Property owners expect to continue paying more insurance premiums, with approximately 44 tornadoes in 2021 in the US alone. It is important to understand that catastrophes, for example, hurricanes affect commercial properties in more than one way. Besides property loss, property owners face the rising cost of materials and labor due to supply and demand. As more people look to rebuild or renovate their property, the demand and cost of labor and supplies increase. 

Property replacement cost

Over the last five years, construction costs have increased by approximately 28%! In fact, in 2021, the total cost of reconstructing non-residential properties increased by 16.5%. As the cost of structural steel increased by 51% and lumber by 22.7%, equipment and machinery replacement costs also increased by 8.5%. Property owners understand the importance of purchasing sufficient coverage even with the rising replacement cost to avoid hefty financial losses. 

Shortage of skilled labor

The COVID-19 pandemic caused delays and a shortage of material and skilled labor, increasing rebuilding costs and time. Other times, unforeseen events, for example, catastrophes like wildfires and hurricanes, disrupt supply chains, thus raising the cost of acquiring skilled labor and building materials. 

Valuation problems

Although it is challenging to determine a property's value accurately, it is possible. A highly experienced underwriter can estimate the value of a property. However, in most cases, they tend to undervalue commercial assets by up to 30%! If the accurate value of a property is unknown, it is nearly impossible to determine the financial damage incurred. Therefore, to avoid a financial loss, insurers increase the premium rates. Since this has been happening for many years, catastrophic losses and inflation only worsened the problem. 

Climate change

Climate change has played a part in increasing property premiums. Severe and unpredictable weather events, for example, wildfires and hurricanes, accompany climate change. Hurricanes Irma, Harvey, and Maria are among the Category 4 hurricanes that have devastated the United States in recent years. Since insurance companies cannot predict future risks, treaty and facultative reinsurance are more challenging to negotiate. The only viable option is for insurers to pass the cost to property owners, increasing insurance premiums.

What Should Commercial Property Owners do to Reduce Premium Rates?

Property owners are advised to mitigate losses. If you mitigate risk and decrease your claims, there is a high chance of getting better premium rates and the Terms and Conditions of your policy. Commercial property owners can do the following to mitigate risks:

• Undervaluation is a real problem; the only way to solve it is through a thorough risk appraisal. Hire a professional and ensure they consider inflation, extreme weather events, and potential supply chain problems. 
• Hire a reputable insurance broker to help you throughout the appraisal, buying, and filing of a claim if need be. Research online and get recommendations from friends and family.
• Buy a higher deductible to reduce your premium rates.
• Always review your insurance policies before they expire to avoid being underinsured or, worse uninsured if disaster hits. 

The takeaway

Property owners should partner with a reliable insurance broker to determine the best way forward. Instead of leaving everything to underwriters or insurance brokers, get involved. Since underwriters are experienced, be sure to ask the right questions to control risks for your tenants, visitors, and employees. Finally, if you are knowledgeable and involved when insuring your commercial property, you will always get the best pricing, terms, and conditions. We can help you understand the Insurance World, by being your Broker Today!

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