How did we get here? Increasing premiums, decreasing coverages and stringent underwriting for everything.
Below are the levers causing our current hard market in the commercial property sector for insurance rates.
- Premium vs. Loss:
- Apartment/multifamily experienced an all-time low in premiums from 2012-2017. As insurance rates went from high to almost too good to last, losses became more frequent and higher in severity for both property and liability claims. With lower premiums and higher than expected losses, the commercial properties division became loss centers within insurance companies nationally.
- Fewer carriers in the market:
- Supply and demand. With an all-time high in demand, the number of carriers and programs available today are far less than 10 years ago. With few insurance companies, rates are driven higher.
- Escalating construction cost/replacement values:
- With construction cost escalating nationally, we need to buy higher limits to cover these higher replacement cost valuations. Buying higher values at a higher rate of insurance, caused an exponential increase in overall premiums paid.
- Aging building systems:
- Previously, all buildings were getting better at great Underwriting criteria was flexible and thinking outside the box was rewarded. Today, good properties will see better rates in a rising market, however less than perfect properties no longer get a free pass. Where building systems are past their useful life, for example Zinsco electrical panels, these will no longer get a preferred rate, in fact they see higher market rates till replaced.
- Location, Location, Location:
- As underwriting criteria became more difficult, underwriters also had access to many other data points, causing an even higher level of scrutiny. Crime scores, brush zones, google earth and street views, previous inspection recommendations and experience in the same zip, city, county and state. Companies offering preferred rates only want to be the best in class for the vintage.
Where does that leave us now? The pendulum swings in both directions, the tide goes in and out. Commercial property rates came from a high in early 2000’s to below parity in 2015, too low to maintain. Currently good properties can get a better than market rate while the cap x deferred properties will be penalized severely. We may never see the heavily discounted premiums we all paid in the past, but I do expect to see rate relief over the next few years as carriers retool underwriting criteria and older properties undergo the need upgrades for the next 20 years.
Today property owners need a savvy commercial property insurance expert in their corner. With the fine print getting more difficult to understand, insurance rates at an all-time high and underwriting appetite changing rapidly, having a specialist on your team will provide dividends in the long run as this market finds its way back to parity.