Owners reeling from double-digit increases on their property insurance premiums in recent years are bracing for more pain in 2024.

“I have been in this business for nearly 40 years, and this is the hardest property market I have seen,” said Alexandra Glickman, senior managing director for Gallagher and global leader of its Real Estate and Hospitality Insurance and Consulting practice. In 2023, even for accounts that have no history of losses related to their property, minimal insurance increases are at 20%. For those accounts that have exposure to Tier 1 wind, increases could range from 30% to 100%. “Those assets that are older and have older roof systems are the ones that are really taking it in the teeth,” said Glickman.

Costs have been soaring for a variety of reasons, and extreme weather is at the top of the list. The insurance industry has taken some huge losses over the past six years, as insured property losses consistently have topped $100 billion annually. According to Aon, natural disasters caused $313 billion in global economic loss in 2022, $132 billion of which was covered by insurance. That makes 2022 the fifth-costliest year on record for insurers. Of the global insured loss total last year, $50 billion to $55 billion resulted from one single event in the U.S., Hurricane Ian.

Adding further fuel to the fire, insured property values have fallen short of actual replacement cost. Insurance premiums are calculated by multiplying the replacement cost of the asset by the rate. Thus, owners and operators hesitate to increase their insured property values because doing so means paying a higher premium. Some organizations haven’t adjusted their values in several years even though building costs alone are up 20% to 30% over the past few years.

Although insurance companies started feeling losses in 2018, they were slow to hike rates because they wanted to keep their market share, added Chip Stuart, chief sales officer for Hub International and North American leader for its Real Estate Insurance practice. The losses piled up, and in 2019 there was a “bird off the wire” effect, he said, in which they all flew at the same time and rates went up. Commercial properties were impacted not only by major weather events but also by damage from unrest in 2020 in cities like New York, Chicago, Minneapolis and Portland, Oregon. The result is that property owners have seen big increases in their annual premiums for the past few years, between 10% and 25%, noted Stuart.

More Increases

Although property insurance costs are rising across the board, it’s not one-size-fits-all. It depends on the property and location, coverage, loss history and risk profile. Properties with greater risk exposures are seeing bigger increases in premiums, as in Florida, Louisiana and other coastal markets exposed to hurricane risk.

There appears to be more runway for cost increases. As of mid-September, more than a dozen named storms already had formed, and the Atlantic hurricane season runs through November. “In a nutshell, weather is a huge factor, and interest rates, replacement cost and inflation also are all factors that go into this,” said Glickman.

For those working on budgets for 2024, Gallagher predicts increases of 10% to 15%, as long as a catastrophic event or events don’t push insurance losses higher in the remainder of 2023. “For most insurance companies, they’re still not where they want to be, but they are returning to profitability,” said Hub’s Stuart. “So I would project that the rate increases that we’ve seen are starting to slow down a bit.” However, the big wild card on rising costs is weather. Year-to-date in 2023, losses are not as significant as in 2022. However, it also is difficult to predict what extreme weather events might occur before year-end, he added.

Scrutiny on Values

Underwriting coverage based on outdated valuations has contributed to outsize claims, another problem insurers are trying to rectify. They’re now paying close attention and seeking up-to-date value information. “Insurers are very data driven right now, and they’re closely watching the settlement trend,” said JLL president of retail property management Kristin Mueller. “They’re watching the types of claims that are being placed and what’s going on in a property.”

Reinsurance companies in particular are backstopping losses of insurance companies. To protect their balance sheets, the reinsurers are forcing more accurate property valuations. That has resulted in a few different courses of action from the insurance companies:

• They can say they’re not interested in writing the coverage.
• They can increase valuation using their own models.
• They can increase their rates substantially to cover for that valuation discrepancy.
• They can put an occurrence limit of liability endorsement on a policy, which effectively says they will give you a 10% margin on value or 110% coverage on that loss. So, if a property is insured at $10 million and the actual cost to rebuild is $14 million, the insurance company will pay $11 million, which is the sum of $10 million and 10%, and the insured will have to come out of pocket for the additional $3 million.

“The old game of playing hide the hat with valuations is dead and gone, and owners don’t want to be caught in a situation where they are really penny-wise and pound-foolish,” said Glickman. If an owner ends up with an occurrence limited liability endorsement that limits coverage, the owner could end up paying a significant amount of money out of pocket. For example, the estimated replacement cost for a property at $120 a square foot may be correct, but if a property is partially damaged, an owner could have to demolish it and then rebuild to the current building code, which might cost $150 per square foot.

According to Glickman, the takeaway is that property owners really need to step back and assess how much risk assumption they are comfortable taking. They also need to be ahead of the game in talking to lenders about what kind of property deductibles they should be taking. They should model their portfolios for true valuations, as well as probable maximum losses for events like wind and earthquakes.

Managing Costs

Often, shopping centers pass insurance premiums on to tenants through common area maintenance charges. However, it also is in owners’ best interests to align with tenants to control costs. Tenants focus on their gross occupancy cost, so the more they have to pay for CAM, the less pricing power owners have to increase the base rents, noted Mueller.

No. 1 among the things JLL’s property management team does to control and mitigate costs is providing good information to assist insurers in underwriting and pricing, she said. A second, important step is to ensure that excellent risk mitigation practices are in place. Maintenance, equipment, improvements and written standard operating procedures show that the property is taking the utmost care to lessen risks. That goes a long way with insurers, as does a history of filed claims that demonstrates that those practices are effective, said Mueller. Insurers also take into account preventive measures meant to harden assets to extreme weather events like flood and wind.

JLL has an insurance program clients can opt into. It bundles properties together into a pool to smooth out the risk and generate better pricing from insurers. Securing coverage for properties in high-risk coastal areas remains a challenge, but many owners participating in JLL’s insurance program do see advantages from the scale, noted Mueller. Across its retail portfolio, JLL generally sees annual increases that are still under 10%.

Many think switching to higher deductibles will provide pricing relief. However, the only scenario in which that happens is if they’ve had a lot of claims, cautioned Stuart. For example, if an owner has had a recent $25,000 water damage claim and another $10,000 claim in the past and decides to move to a $50,000 deductible, that likely would result in a premium reduction. Raising the deductible likely won’t benefit an owner who hasn’t filed any claims, though. “That sounds a little bit backwards, but you’re already getting a good premium because you have no claims,” he said.

According to Stuart, another value opportunity for owners is to be able to articulate three key things. When was the last time you upgraded your electrical? When was the last time you upgraded your roof or fixed your roof so it won’t leak? When was the last time you upgraded your plumbing? Underwriters are using computers to underwrite everything. If an owner doesn’t document those things, the computer will generate a quote automatically based on poor marks. “The best advice is to start early on your renewals,” he added, “because brokers are having to go to a lot more insurance companies than we used to to get competitive quotes.”