The ability to secure insurance has historically been a rock-solid safety net for businesses in the event of unforeseen loss. However, in recent times, the insurance market has been in flux, and insurers are being confronted with unforeseen challenges. According to a recent industry report, current market conditions will likely continue for the remainder of the year.
This is due to several factors:
- Weather events/climate change: severe weather conditions combined with natural disasters like flooding, wildfires, and windstorms.
- Property valuations: an increased emphasis by carriers on property owners and operators to utilize accurate replacement cost valuations.
- Market capacity: a decreased appetite among carriers for certain properties.
- Rising building cost: The prices of nearly everything, from construction materials to labor, are on the rise.
CLIMATE CHANGE /SEVERE WEATHER EVENTS
Insurance rates have been rising due to the significant impact climate change has had on the sector. Insurers face greater financial risks from payouts and claims related to extreme weather disasters as the climate continues to change. Climate change makes it difficult for insurers to plan for future financial losses due to factors like rising sea levels, warmer temperatures, more frequent storms, and longer wildfire seasons.
According to a recent report, weather event (floods, storms, nor’easters…) related claims for the first half of 2023 totaled over $34 billion in the U.S. alone. This is almost twice as much as the average for the past 10 years over the same period.
PROPERTY VALUATION
One of the most noticeable shifts is that insurance firms have been compelled to reevaluate the cost of rebuilding a damaged or destroyed property.
During softer market years, most property insurers did not emphasize the importance of updated and accurate property replacement costs. What has resulted is that many property portfolios are underinsured on a cost-per-square-foot basis. A study conducted by McKinsey revealed that in 2022, there was a $32 billion increase in how much insurers paid over initial expectations.
According to a Q1 2023 status of the market analysis by national insurance wholesaler Amwins, carriers estimate that the insurance-to-value ratio for real estate property portfolios is off by 30 percent or more. Property owners have benefited from this in softer markets. Property premium is a simple math equation; a rate is applied to every $100 in total insurable value. Therefore, a lower property valuation results in a lower property premium due to the lower premium basis. This is results in carrier offering higher premiums and less favorable terms.
RISING COSTS & MARKET CAPACITY
The cost of construction has increased. Moreover, during periods of rebuild and repair, there is often an additional component to the claim regarding business interruption or loss of revenue. Carriers are increasing their focus on correcting assets’ replacement costs and accurately reporting business income figures accordingly.
Additionally, many carriers are dropping certain properties due to high-risk payouts, leaving property owners with few options for coverage. Further, deductibles have increased to nearly unmanageable sums.
WHAT CAN YOU DO?
Though there isn’t much that can be done to control some of the factors mentioned in this article, it is crucial that all Community Associations review their deductible structure and coverage limits as well as be proactive in implementing risk management strategies to prevent losses. In the current market, losses will inevitably cause premiums to increase and possibly cause a carrier to non-renew. If you take preventative measures in your own hands and lean on your management professional and insurance advisors, you will be better equipped to navigate the challenges of the current market.
David Velasco has worked in the habitational industry for close to a decade and thrives on connecting people. Solving problems for clients and connections is his daily motivation. Joining the JGS team is a natural progression of his path forward. Serving on the committees of several organizations, he is a recognized industry professional, providing education through his webinar series, public speaking engagements, and social media presence
