What to Expect from a Volatile Commercial Property Insurance Market in 2023

The property insurance market is dynamic, always responding to current macroeconomic trends and the industry’s recent claims history. Even if you haven’t experienced a loss on a commercial property, or if claims have been relatively low in your region, these broader trends will impact you when it comes to coverage availability, limits, and rates.

So, what can you expect of the commercial property insurance market in 2023? Here’s a look at what to prepare for this year if you need to renew a policy or obtain coverage for a new property.

The Repercussions of Catastrophic Weather Claims

When Hurricane Ian tore through Florida in September 2022, it caused widespread devastation that’s estimated to top $50-60 billion in insurance claims—not just in Florida, but also in surrounding states like North and South Carolina. Last year also proved a difficult one for wildfires, with nearly 70,000 fires causing extensive damage in numerous western states.

But it’s not only these regions that are seeing the repercussions of the severe weather-related incidents of 2022. No matter where you own commercial property, you’ll experience more difficult renewals, lower policy limits, and higher rates this year as insurers react to the massive claims they’re now paying out.

When reinsurers renegotiated their agreements with property insurers effective January 1, most reduced the limits they offer on a single policy and increased their rates, while others pulled out of certain markets entirely. The greatest impact has been in areas at high risk of catastrophic weather incidents, like hurricane-induced flooding and wind in Florida, Louisiana, and the coastal regions of North and South Carolina, and wildfires in California, Colorado, and other western states. Yet, these impacts trickle down to property owners across the country in the form of tighter capacity and rate hikes.

With reinsurers pulling back on how much risk they’ll take on, and fewer players in the highest-risk markets, it may require layering several policies to get the policy limits you need to cover a single commercial property or an entire portfolio, no matter where those properties are located. The more insurers it takes to obtain the policy limits you need, the higher your total premium will be. In high-risk regions, rate increases of 50-75% may be the norm this year.

Even if you’re not located in an area prone to severe weather, if you have a history of losses or your properties are made of frame construction, you could see commercial property rate increases as high as 25-75%. For properties in lower-risk areas with better construction, such as steel, this year’s rate increases are likely to be a more modest 5-10%.

The Consequences of Skyrocketing Real Estate Values

In most major markets in the US, real estate values have risen dramatically over the last few years. Whether you purchased commercial property during this period, or you’ve owned your properties for decades, there’s a good chance that you’re insuring those buildings for less than it would now cost to repair or rebuild them. That’s especially true if you’ve been renewing with the same carrier and haven’t taken a critical look at your policy for some time. 

With high inflation, strong demand, and unprecedented supply chain constraints driving up the cost of building materials, and a tight job market fueling higher labor costs, property insurance claims are now much more expensive than they were just a few years ago. So even if you and your agent haven’t focused on whether your property values are up to date for insurance purposes, you can be sure that the insurers have. Their claims history tells them that today’s inflation-driven costs necessitate a higher insured value for most commercial properties.  

A higher insured value will certainly increase your premium, but the risk of not insuring to the correct replacement value is too great to ignore: You could end up paying out of pocket for the difference between your policy limit and the actual repair or reconstruction costs. That’s why it’s critical to assess your commercial properties in 2023 and confirm they’re insured to the right value.

What Can You Do in Response?

When insurance capacity is tight and rates are rising, which is expected to be the case through at least mid-year, there are several steps you can take to adequately protect your commercial properties and minimize these impacts. Keep in mind that the market is dynamic, and some industry sources believe capacity and rates increases may ease up in the latter half of the year, especially as new insurers enter the market.

• Consider a higher deductible. With lower policy limits now the norm, some commercial property owners are buying less insurance and taking on more of the risk themselves through a higher deductible. In other cases, the carrier might require that you take a higher deductible, transferring more of the risk to you.

• Look into a captive arrangement. Though participating in a shared captive or forming your own captive isn’t right for every business, it might be an effective strategy if you own a large commercial property portfolio and your premiums are becoming exorbitant. While it may be tough to find a commercial property insurance captive, if your total premiums are high enough it may be financially feasible to form your own.

• Beef up your risk management efforts. It always pays to employ proactive risk management to reduce the incidence of property damage, but especially in a rising rate market. For example, by investing in improved fire protection, updated water piping, or leak detection systems, you can reduce the risk of a loss and minimize the consequences if a loss occurs. Measures like these will make your commercial property more attractive to underwriters, which can help keep any rate increase to a more modest level.

How B. F. Saul Insurance Can Help

The advisors at B. F. Saul Insurance have a wealth of experience in commercial property insurance and extensive knowledge of the real estate market, especially in regions most at risk for catastrophic weather events. We can help you take a thoughtful approach to protecting your commercial properties in today’s tough insurance market.  

Schedule a call to discuss strategies for managing your commercial property risk in 2023.