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Commercial Property Insurance: Navigating a Tough Market

By February 7, 2024No Comments

While Commercial Property Insurance remains a tough market characterized by unfavorable rates, stringent underwriting, and limited capacity, the good news is that organizations can adopt strategies to enhance their marketability.

More encouraging still, relief is emerging on the horizon. Business Insurance reported in a recent article, “Commercial property insurance rate hikes come off highs,” insurer capacity is expected to grow in 2024.

As the market shifts, here are three strategies to optimize your organization’s positioning for your next renewal or new business application.

Start renewals early with a proactive game plan

First, start early, and take a proactive stance. A diligent broker will play a crucial role in this process by engaging early with the incumbent carrier, gathering valuable insights, and securing potential commitments.

Timely and effective communication during the early stages is paramount. By anticipating challenges in advance, you can avoid surprises while providing yourself ample time to explore viable options. Ensure that property valuations are current and in line with current construction costs before submitting the application to underwriters.

Properties with loss ratios exceeding 50% or with frequent losses will encounter difficulties securing comprehensive coverage. While catastrophic events can be explained, claim frequency poses a distinct challenge, as frequency usually leads to severity. Underwriters seek to understand the reasons for frequent claims and expect to see new protocols implemented to prevent future occurrences.

In some cases, carriers may request onsite inspections to assess risks. Given the potential time required to schedule and complete an inspection, initiating the process early is advantageous for your application. Also consider new risk management strategies such as obtaining a property resilience assessment and implementing new, site-specific loss-control measures.

Prevent non-weather-related water damage

After catastrophic losses such as hurricanes and storms, water damage from non-weather-related events emerges as the most frequent and severe claim driver. The primary culprits: leaking pipes, toilets, and sprinkler systems.

These exposures are of such significance that the Environmental Protection Agency (EPA) has designated an entire week, March 18-24, 2024, for its 16th annual “Fix a Leak Week.” This initiative aims to educate individuals on finding and fixing leaks in both residential and commercial properties.

For commercial properties, implementing a robust risk management plan is crucial to identifying water risks and adopting proactive measures to prevent losses. Essential components include conducting regular maintenance inspections and creating an emergency response plan. Swift response measures, such as promptly shutting off water, can significantly mitigate damage and remediation expenses.

Risk management tip: Train everyone who lives or works in the building on how to turn the water off. In critical situations, minutes can make the difference between a $20,000 claim and a $2 million claim.

Partner with a specialized broker

The insurance market is migrating toward niche areas, and brokers specializing in specific property risks have a competitive edge. As a result, collaborating with a broker who specializes in your industry significantly enhances the probability of securing favorable pricing, limits, and policy terms in the marketplace.

Brokers with a focus on specific niches possess broad market access and can present your new business application or renewal to multiple carriers actively seeking organizations similar to yours. Leveraging a broker’s buying power and well-established relationships becomes instrumental in navigating challenges related to Property Insurance within your niche industry.

A proactive broker will also scrutinize your policy forms, and review endorsements and exclusions that can impact coverage. One such consideration is the margin clause, which restricts coverage based on replacement cost valuations. Additionally, carriers are significantly increasing water damage deductibles, which may no longer meet your loan requirements and could require clearance from your lender.

Market outlook on Commercial Property Insurance

Here’s what Alera Group said in their 2024 Property and Casualty Market Outlook about factors influencing the market for Commercial Property Insurance:

“The market will remain challenging as insurers continue to emphasize rate adequacy and insurance-to-value in their quest for profit.

  • “Pricing increases will continue at double-digit levels. Rates are expected to moderate midyear, absent any extraordinary catastrophes. Average pricing is projected to increase by 10%-15%. Businesses with historical losses or in catastrophe-prone regions should anticipate higher increases. The combination of an industry-wide drive toward rate adequacy, insurance-to-value, and inflationary costs could result in 25%-30% increases for some. Even the best accounts will experience inflation-driven increases of 6%-8%.
  • “Availability and capacity remain insufficient to meet market demands. Insurers continue to have difficulty securing their reinsurance capacity at desired limits and terms, particularly for catastrophe perils. Because insurers are reserving their full capacity for best-in-class accounts, many carriers will renew existing accounts at the same limits and coverage terms but will resist offering additional capacity or more favorable terms. For insureds seeking limits over $5 million, it may be necessary to layer limits from multiple insurers, attach at higher levels, or seek coverages from nonadmitted markets.
  • “Underwriting scrutiny will continue at current levels. Insurers are considering fewer applications and more carefully underwriting each coverage section rather than taking an overall “bottom-line” approach to accounts. Each coverage must stand on its own. More detailed information, insurance-to-value, appraisals, and inspections are required to underwrite the risks and to price for profit. Businesses subject to catastrophic named storms, wind, hail, flood, fire, and earthquakes will receive the most scrutiny.
  • “Underwriting processes will involve more extensive utilization of technology. Be sure properties are clearly identified and accurately described. The best practice is to perform replacement cost appraisals six months prior to expiration, recognize the need for insurance to full value, and begin the submission process well in advance of expiration dates.”

Cause for optimism

Despite existing challenges, there is optimism for improvement this year, thanks largely to the ongoing realignment of property rates and property valuations that match current market conditions.

For a broader look at navigating insurance market conditions, download the 2024 Property and Casualty Market Outlook. The report provides valuable information on factors driving the current P&C market, with analysis categorized by industry and lines of coverage, personal as well as commercial.

To speak with a local broker who specializes in Property Insurance and has access to resources nationwide, contact Foa & Son today.


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