6 Commercial Property Drivers That Impact Insurance Costs
The market for commercial property insurance continues to be challenging. Below are several factors contributing to increasing premium for commercial property coverage.
1. Catastrophe Losses
Large catastrophes, including tornadoes, hail, floods, wildfires, hurricanes and winter weather, are happening with increasing frequency across the country. This volatility has caused 10 or more weather and climate events with losses in excess of $1 billion each in the U.S. for six consecutive years, and eight of the last 10.1 Riots added to catastrophe losses in 2020.
2. Property Replacement Costs
The cost of construction has increased between 4% and 5% annually over the last five years.2 The cost to replace damaged or destroyed business personal property is also on the rise, up 2% annually over the past three years.3 Having the right insurance coverage limits to meet rising replacement costs is vital in case a business suffers a loss.
3. Skilled Labor Shortage
A shortage of skilled workers is increasing the amount of time and money it takes to rebuild. A recent survey from the Associated General Contractors of America found that 81% of respondents reported difficulty in filling positions, with two-thirds expecting that trend to grow in the coming 12 months.4
4. Property Rate Inadequacy
While the industry has seen incremental rate improvement for property exposures, rate inadequacy continues to challenge the line’s profitability. This is driven by years of elevated catastrophe events, rising attritional (non-catastrophic) weather losses and increased frequency of severity in large fires. Average property rate increases of 20% are the norm.5
An estimated 75% of commercial businesses are underinsured by an average of 40% or more.6 With replacement costs outpacing existing insured values, it is vital for property owners to have current and accurate insurance valuations to make sure limits will cover the costs to replace insured property.
Over the past five years, major catastrophes have driven reinsurance costs higher, and that trend is predicted to continue.7 Higher costs for both treaty and facultative reinsurance have an impact on rising property insurance rates.
1 Billion-Dollar Weather and Climate Disasters – NOAA
2 ENR 2Q Cost Report Economics
3 Bureau of Labor Statistics, PPI Table 9, Commodity (2015-2020)
4 Strong Demand for Work Amid Stronger Demand for Workers: The 2020 Construction Hiring and Business Outlook
5 Property insurers impose policy restrictions, hike rates: Business Insurance
6 Risky business: Right-size your insurance to save money, protect assets
7 Reinsurance rate increases to continue through 2021 KBW
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