6 Forces Driving Commercial Property Insurance Costs

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 globally^1. Last year, total insured losses globally were estimated at a staggering $140 billion.²

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

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.

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.

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.

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