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Are the tides finally turning for commercial real estate insurance?
By Mercer Ferguson & Stephen McCord
A rapidly softening insurance market is at the top of the holiday wish list this year for many in the world of real estate. This year has been an eventful ride, with Q3 2023 closing out as the 24th consecutive quarter of price increases for commercial property coverage. This hard property market impacts various parties, from businesses and investors to underwriters and brokers.
However, there is a chance for positive shifts for less catastrophe-prone and lighter occupancy risks as the new year comes around. Q3 of 2023 was the 11th quarter in a row where increases in the global insurance market eased. The trend this past quarter showed rates increasing on an average of 3%, down from 18% in Q1 2021, according to Marsh McLennan Agency's (MMA) Business Insurance Trends report. Rate increases over the last six years have been no secret, but seeing the level of those increases lessen over the past two years should provide hope. Additional good news is that builder's risk—the cost to get a project off the ground—has consistently softened in the last year to 18 months.
While it was a very active 2023 hurricane season—the fourth highest on record since 1950—there was a noticeable decrease in domestic property damage compared to years past. With 2023 being a potentially profitable year for some carriers, Marsh McLennan Agency anticipates that the January 1, 2024 reinsurance renewal rate increases will be much lower than last year's record-setting increases.
As a result, there is the chance for more carriers to deploy additional available capacity, write new business in some areas they previously exited (Florida, Louisiana, Texas, and California), and broaden their risk appetites. An increasing appetite from carriers should bring a surge in the need and desire to write new business, giving businesses more than just one option at renewal.
Over the past five years, the real estate and hospitality industry has seen a consistent annual increase in the valuation of large property values. These increases resulted in additional exposures and more expensive insurance costs. Supply chain issues stemming from COVID-19 and economic inflation put a microscope on low insurance valuations. These valuations caught the attention of many carriers, leading them to confirm that they would receive the appropriate premium for the potential reconstruction of a property. Businesses have also caught wind of these trends, leading them to properly adjust their reported property values at acceptable levels for many carriers.
Despite these favorable trends for property owners, there is growing concern that new challenges will start adversely affecting trends for commercial real estate casualty coverage lines with an emphasis on general liability and umbrella/excess liability. Mother Nature is leaving a mark on the country, as shown in extreme weather events' increasing severity and frequency. However, there are other challenges outside of the catastrophic risks of natural disasters. Economic hurdles, unabated social and economic inflation, and global political risks are other loss trends beginning to catch up with rates.
There is an expectation that there will continue to be slow increases in rates down the line. Hopefully, this trend will help drive the insurance market back into the black. To help reinforce these moderating gains, real estate and hospitality businesses must become more proactive in the ownership, safety, maintenance, and purchasing of their overall portfolio of assets.
It's more important than ever for businesses to provide detailed information and examples of how they are safeguarding their properties. This step allows companies to place their assets in the best possible light for insurers. Proactive measures can range from security patrols and video cameras to mandating Tenant Legal Liability Insurance (renter's insurance) through creative plan designs, such as a captive program.
As your business takes proactive measures, remember that every account and property portfolio is unique. Don't assume anything. Every business can tell a similar but different story that can sometimes make all the difference in the quality and price of coverage they can secure. Your business should routinely work with an insurance broker to evaluate and scrutinize budget figures and revisit those figures consistently throughout the year.
Marsh McLennan Agency helps you transform these challenges into opportunities. Work with a partner to create a strategic plan that aligns with your short- and long-term organizational goals. Discover choices, alternatives, and advice that help you overcome today's trends and beyond.
