What is squeezing the commercial property insurance market?

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In an effort to increase profitability, E&S carriers ditched unattractive risks, increased rates, lowered coverage limits and adjusted policy terms, RPS said.

“Many insurance companies are hopeful that these measures will bear fruit in 2022, but the E&S real estate market is complex and dynamic,” said Wes Robinson, national president of real estate at RPS. “The uncertainty surrounding catastrophic events means most will be extremely cautious about how they approach this market.”

Robinson predicted that many policyholders will see their rates moderate this year – but there will be plenty of exceptions, especially when it comes to catastrophe-exposed risks and loss-affected accounts.

Insurers generally expect the warming trend to continue in the United States, RPS said. This trend is driving the frequency and severity of natural disasters such as tornadoes and wildfires.

Given the losses from such disasters, improving prices will not be enough to prevent many reinsurers from reducing capacity, RPS said.

“Climate change is now a strategic concern for many reinsurers as well as commercial property owners,” Robinson said.

Catastrophic weather is just one of the challenges facing the commercial P&C insurance market, RPS said. Other challenges identified in the report include:

  • Inflationary pressures: Inflation resulting from the pandemic has driven up labor and material costs, while supply chain disruptions are increasing the time it takes to build, repair or rebuild commercial properties. As a result, many construction projects are behind schedule and it is becoming increasingly common for a builder’s risk policy to expire before a project is complete.
  • Late reporting of claims: Late reporting often occurs when there is property damage that the insured did not immediately discover (such as roof damage from hail) or did not realize was covered by their policy. commercial property insurance. This is a problem when a claim is filed after a policy is renewed, as the new rates will not accurately reflect the insured’s loss history.
  • Sub-declaration of property values: Underreporting of values ​​continues to be a significant challenge to insurers’ profitability, RPS said. With inflation at its highest level in 40 years, the gap between what a property is insured for and what it would cost to rebuild it has increased in 2022. This is a common problem in the residential real estate industry, where older buildings that need to be remodeled and rebuilt to higher code standards often result in claims that exceed the policy’s replacement cost coverage.
  • Limited capacity and treaty rate increases from commercial property reinsurers.

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As property insurance rates rise, agents will have to have tough conversations with customers — especially those whose properties are in areas prone to damage from convective storms, hurricanes and wildfires. , said RPS.

Robinson suggested that these agents work with a wholesale broker who has experience with difficult real estate risks and who has close relationships with E&S insurers.

“It’s vitally important to start the renewal process early to prepare for the unexpected with a backup plan,” he said.

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