Reinsurance, which is insurance for insurers, is an essential element in determining the cost and availability of commercial real estate coverage. Because reinsurance costs have risen more than 30%, according to the Guy Carpenter U.S. Property Catastrophe Rate on Line Index, and capacity has fallen 20%, finding affordable coverage remains challenging.
Reinsurance challenges have resulted in insurers increasing premiums and limiting capacity for commercial real estate. But there are ways for owners and operators to cope.
Surge in Catastrophic Losses
The main cause of woes in the reinsurance market was global natural disasters, which totaled $275 billion in 2022, one of the costliest years on record, reported the Swiss Re Institute. Insurance carriers buy reinsurance to protect themselves financially from major losses (like those from disasters in 2022). When reinsurers raise costs or limit capacity, insurance companies must take on more risk; in turn, they will raise rates, limit their exposure to risk through higher deductibles or lower the amount they’re willing to insure.
Real estate owners and operators can’t do anything about the reinsurance market, but they can minimize the fallout.
Maintain Best-in-Class Properties
Property owners who aggressively manage risk, especially to minimize exposure to flood and fire, will find more options and better pricing. It is also critical that properties are well-maintained and have excellent security to help prevent theft and damage.
Appraise Properties for Reconstruction
Replacement cost values on property policies have not been adequately increased to cover skyrocketing rebuilding costs. Carriers are shying away from policies with valuations that are too low or inaccurate. They may automatically increase premiums to cover higher replacement costs where they deem values underinsured. In some cases, a coinsurance penalty may be added to the policy or claims denied if the owner was underinsured.
A third-party reconstruction appraisal submitted with a property insurance application or renewal may help assuage carrier worries.
Consider Parametric Insurance
A parametric policy covers the risk of property damage from a given peril, like storms — a parametric policy will pay out even if the property does not incur damage. Because the payout is expedited, real estate owners and operators can immediately cover losses such as business interruption costs.
Find the Right Resources
It is important to have the resources to leverage creative solutions that can save on insurance costs, such as CAT modeling, splitting off less-desirable locations, using multiple carriers or looking for hidden liabilities in property leases. A trusted advisor can help.
