broker explaining why commercial insurance premiums are rising

Why Commercial Property Insurance Premiums are on the Rise

If you’re a real estate investor or owner, you may have noticed a significant increase in insurance costs compared to previous years. In fact, Quarter 3 of 2022 marked the 20th consecutive quarter of increased commercial property insurance premiums, according to the Council of Insurance Agents and Brokers (CIAB).

The average premium increase across all account sizes was 8.1% in Q3 2022, up from 7.1% in the second quarter.

In this article, we will discuss why these premiums are increasing and how commercial property owners can prepare. Let’s get started.

Why Are Commercial Property Insurance Premiums Rising?

According to CIAB, commercial property saw premiums rise an average 11.2% in Q3 compared to 8.3% in Q2. This increase was driven by inflation and a rise in natural catastrophes. 

Let’s discuss.

How Inflation Affects Commercial Property Insurance

95% of insurance brokers agreed inflation was influencing market trends in the third quarter, especially in commercial property. Why? Inflation increased factors such as construction costs. These factors lead to increased property valuations.

How a Rise in Natural Catastrophes Affect Commercial Property Insurance

More than half of respondents reported an increase in commercial property claims in Q3, possibly driven by catastrophes. Floods were up in Q3, with 31% of respondents reporting an increase. 

What Commercial Property Owners Need to Know and How to Prepare

Inflation and Valuation Concerns

Rising inflation rates in the United States may leave many property owners underinsured or without adequate coverage. 

During standard periods of inflation, the rate of inflation increases approximately between 2% and 3% per year. However, the U.S. is currently experiencing an overall higher rate of inflation, especially in industries such as construction. 

In fact, construction material costs are up 20% according to the General Contractors of America

Inflation drives the prices of goods and services up, such as the cost of:

  • Goods/Materials
  • Production
  • Labor
  • Resourcing

Additionally, supply disruption, and construction labor shortages, may also result in an increase in these prices. Real estate owners should be aware of these increases and how they affect the value of their property.

Commercial Property Owners Should Insure Property for the Accurate Value

Inflation may cause insurance premiums to increase. As a result, this increase may cause commercial property owners to be hesitant to invest in the right policy and instead opt for minimal coverage. However, many companies recommend that building owners insure their property  for at least 100% of their accurate value, if not more. 

Commercial property owners should be adjusting their policy to compensate for how much their home and renovations are worth. With inflation generating increased real estate values, unfortunately, property owners have more to lose.

Standard Commercial Insurance Coverage vs. Additional Policies

Insurers may require coverage for some natural disasters – such as flooding, earthquakes, and volcanic eruptions –  to be separate policies.  If your business is located in an area prone to these events, be sure to note if they are covered in your commercial insurance plan or if you need to purchase a separate policy. 

For more information about natural disasters and commercial insurance, check out our blog, here.

What Owners Should Do Now

Owners should become familiar with their current policies prior to or early in the financing process to avoid any surprises. With rates rising in the current inflationary environment, it’s important to make sure one has the right relationships in place. These relationships can help real estate owners and investors find innovative solutions to help reduce the cost of their insurance while ensuring they maintain adequate coverage.

According to Forbes, “Insurance specialists can look through one’s policies to see if there is any extraneous coverage and provide active risk management to implement different loss control strategies to potentially limit the severity or reduce the impact of a claim.”

Any Questions?

For more information, contact us today or check out our policies. 

Apex Risk is dedicated to providing clear explanations and guidance that addresses real problems that may arise for your business in your unique industry. Learn who we are and why we do what we do, here.