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  • 6 Forces Driving Commercial Property Insurance Costs

6 Forces Driving Commercial Property Insurance Costs

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The market for commercial property insurance continues to be challenging. Here are several factors contributing to premium increases for commercial property coverage.

1. Catastrophe Losses

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Hurricanes, floods, wildfires, tornadoes, winter storms. The frequency and severity of major catastrophes continue to stress the industry. In five of the past six years, these events have caused annual insured losses of more than $100 billion globally1. Last year, total insured losses globally were estimated at a staggering $140 billion.2

2. Reinsurance

grey and white icon of a circular arrow, with the letters RE inside of it grey and white icon of a circular arrow, with the letters RE inside of it

Catastrophic events are a major factor driving up the cost of reinsurance — an expense primary carriers need to pass along to customers. At the same time, inflation and the economic environment has been making reinsurers more selective.3 In early 2023 the gap between reinsurance supply and demand was estimated at $60 billion, three times what it was the previous fall.4

3. Underinsurance

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Recent inflation has driven the cost of materials and services much higher, but just 43% of business owners say they have increased their policy limits to accurately reflect what it would take to replace insured property now.5 Customers must have accurate valuations for their assets so they don't come up short after a loss, and premiums will reflect those higher values.

4. Property Replacement Costs

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Led by a 55% increase in the cost of structural steel and a 35% increase in the price of lumber, construction costs have jumped over the past three years: Nonresidential is up 36% and multifamily residential is up 32%. Similarly, machinery and equipment costs have increased 18% over the same period.6 Many contractors continue to grapple with materials shortages and supply chain disruptions as well.

5. Skilled Labor Shortage

grey icon with connector arrow and right angle grey icon with connector arrow and right angle

Nearly half of reconstruction costs are wages and salaries, which have increased 16% over the past three years.7 Even with higher pay, nine out of 10 contractors are struggling to find skilled labor and are delaying projects as a result.8 Higher rebuilding costs and longer delays may trigger an increase in business interruption losses.

6. Property Rate Need

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For years, escalating loss trends have outpaced rate increases, primarily because of the costs of catastrophes, severe weather and large fires. Expect carriers to raise rates again this year to close the gap.9

Sources
1 Moody's
2 Gallagher Re
3 Aon
4 Artemis
5 The Harris Poll
6 Bureau of Labor Statistics
7 Monthly Establishment Data - 2019-2022
8 Associated General Contractors of America (PDF)
9 Insurance rates expected to rise again this year

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The Travelers Indemnity Company and its property casualty affiliates. One Tower Square, Hartford, CT 06183
This material does not amend, or otherwise affect, the provisions or coverages of any insurance policy or bond issued by Travelers. It is not a representation that coverage does or does not exist for any particular claim or loss under any such policy or bond. Coverage depends on the facts and circumstances involved in the claim or loss, all applicable policy or bond provisions, and any applicable law. Availability of coverage referenced in this document can depend on underwriting qualifications and state regulations.
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