Reinsurance, which is insurance for insurers, is an essential element in determining the cost and availability of coverage for commercial real estate. And because reinsurance costs have risen more than 30% recently1 and capacity has fallen 20%, finding affordable insurance coverage for real estate owners remains challenging.
Surge in catastrophic losses driving the cost of reinsurance
The main cause of woes in the reinsurance market has been losses related to global natural disasters, which totaled $275 billion in 2022,2 making it one of the costliest years on record. Hurricane Ian accounted for insured losses of $50 billion to $65 billion alone.3
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.
The result: Real estate operations are paying more for less coverage. Unfortunately, the situation isn’t likely to change anytime soon.
How to minimize the pain
Real estate owners and operators can’t do anything about the reinsurance market, but they can take several steps to minimize the fallout. Here are three ways to help:
- 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 costs
Replacement cost values on property policies have not been adequately increased to cover skyrocketing rebuilding costs. As a result, carriers are shying away from policies with valuations that are too low or inaccurate. Also, carriers may automatically increase premiums to cover higher replacement costs where they deem values to be underinsured.
In some cases, a coinsurance penalty may be added to the policy or claims denied if the carrier finds the property owner was underinsured.
A third-party reconstruction appraisal submitted with a property insurance application or renewal may help assuage carrier worries about reconstruction costs and avoid extra costs and penalties.
- 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 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, placing coverage with multiple carriers or looking for hidden liabilities in property leases. A trusted advisor can help determine how to proceed — and show different options that can help find the best coverage at the best price.
Contact HUB’s real estate insurance team for more information on navigating current real estate insurance challenges.
1 Reinsurance News, “US property cat reinsurance rates-on-line up 30.1% at January renewals: Guy Carpenter,” February 2, 2023.
2 Swiss Re, “A perfect storm: Natural catastrophes and inflation in 2022,” March 22, 2023.
3 Swiss Re, “Hurricane Ian drives natural catastrophe year-to-date insured losses to USD 115 billion,” December 1, 2022.