Buyers of commercial property insurance have seen wide swings in the market over the past two years. 2023 saw a hard market, as rates spiked and deductibles increased, while accessibility, coverage limits, and competition shrunk. That left property owners paying more money for less coverage.
This year, we’re starting to see some relief, with signs that the insurance market is stabilizing. That’s welcome news for commercial real estate owners, managers, and tenants looking for a break from high rates and difficult renewals.
The reset that hardened the market.
Numerous external factors—geopolitical unrest, economic uncertainty, higher interest rates, elevated construction costs, and the escalating frequency and intensity of weather-related catastrophes—played a part in the initial hardening of the market. But it’s high inflation and supply-chain disruptions that drove increasing construction costs by 10% to 15% annually.Disclosure 1 Heightened replacement costs sparked dramatic increases in property valuations—at times 40% or higher—and contributed to severe losses on the property side.Disclosure 2 The multifamily space was especially hard hit by numerous catastrophic weather events.
Insurers, needing to remain profitable, pulled back on the protection they offered. Higher costs to cover, administer, and investigate claims compounded the issue and prompted a few carriers to exit higher-risk markets entirely.
Reinsurers, who protect insurers from high dollar claims and provide stability and affordability to the insurance market, faced these same challenges, and adjusted by raising rates and lowering the coverage limits extended to insurance carriers. Reduced availability, lowered capacity, and limited competition within the CRE insurance market shifted the burden from reinsurers to carriers and onto property owners. For commercial property owners, coverage became difficult to obtain at any cost.
Insurance conditions appear to be stabilizing.
Encouraging signs suggest the market is becoming more reliable. Supply chains are recovering, and inflation appears to be slowing. Replacement costs, with perhaps a marginal uptick, are steadying. Toward the end of 2023, reinsurance renewals began to stabilize, and the first quarter of 2024 saw the reinsurance market start to return to normal. There’s markedly more reinsurance capacity today than a year ago resulting in more availability at renewal time at the insurance carrier level.
A low-impact hurricane season in 2023 brought profit levels for carriers toward normal.Disclosure 3 Consistent profits are vital for a robust marketplace where insurers are ready and willing to write risk. Profitability leads to restored capacity and has, likewise, increased competition in the CRE insurance marketplace.
The recent introduction of competition from the London Market has contributed to more favorable conditions for commercial property renewals, particularly in markets with an elevated risk of exposure to catastrophic events. The dynamic of greater competition between the U.S., London, and Bermuda markets should help decrease this pain point for commercial property owners.
Take advantage of these market conditions.
While the commercial real estate insurance market has started to swing back to normal, it’s by no means a soft market. Getting the right coverage at the best rate will still require the right buying strategy along with diligence throughout the process of securing coverage. Take these steps to improve your chances for the outcome you want.
Act now to secure the best coverage. Conditions in today’s market are more favorable for policy renewals than in the last few years. Coverage is available, and rather than settling for the undesirable terms doled out last year, you may find insurers willing to negotiate better terms or compete for your business. However, don’t expect rates to return to previous levels. They are more likely to hold steady or increase slightly.
We don’t know if the positive indicators will continue, or how long this shift might last. The storm season is still ahead of us, so current conditions could change.
