The US commercial property insurance market is seeing a significant shift as it moves into a softening phase. This change comes after nearly ten years of rising rates and stricter underwriting practices. As premiums begin to decline, businesses that have faced increasing costs in recent years are finally experiencing some relief.
However, while this trend is favorable for clients, insurance brokers need to pay attention. Carriers are adjusting their underwriting strategies and becoming more cautious about specific risks. Henry Daar, who leads US property claims at Willis, shared insights on how recent weather events continue to shape the market.
As premiums decrease, both insurers and brokers face reduced revenue since commissions are linked to the size of premiums. To adapt, insurers are implementing higher deductibles and modifying rates to protect themselves from unpredictable losses.
Even with lower rates, insurers are tightening their standards, especially for older properties and industrial buildings. Daar pointed out that roofs older than 15 years might only be covered for their actual cash value, which can result in significant financial differences during claims. For instance, a roof that is 17 years old could lead to costly damage during a storm, prompting insurers to encourage property owners to replace them.
Additionally, the market is shifting away from fixed-dollar deductibles for hurricanes. Instead, many insurers are adopting percentage-based deductibles, particularly in high-risk coastal areas. For example, a 5% deductible on a $50 million building translates to a $2.5 million deductible, a substantial increase compared to previous flat amounts.
Looking ahead, the National Oceanic and Atmospheric Administration (NOAA) has forecasted a 60% chance of above-average storm activity this year, predicting between 13 and 19 named storms, with several expected to strengthen into hurricanes. Despite these projections, Daar cautioned that past predictions have not always matched reality. He recalled how 2017 was expected to be a mild hurricane season but ended up being devastating with storms like Harvey and Irma.
The impact of storms can vary greatly depending on where they make landfall. For example, hurricanes that hit less populated areas may not cause significant commercial damage, while storms like Hurricane Ian, which affected densely populated regions, resulted in major losses.
Daar warned that the outlook for the property insurance market could change rapidly if a major catastrophe occurs. A severe hurricane season could lead to losses between $100 billion and $200 billion, which would likely alter pricing dynamics once again.
Moreover, wildfires are prompting insurers to rethink their coverage areas and demand stricter loss control measures. Recent destructive fires in California have highlighted the need for proactive risk mitigation strategies, especially for high-value properties.
As hurricane season approaches, Daar emphasized the importance of accurate property valuations. In today’s inflationary climate, underestimating replacement costs can lead to disputes when claims are made. He also highlighted the need for operational readiness. Businesses should prepare well in advance of a storm, ensuring that they protect their assets and minimize risks.
In summary, while the commercial property insurance market is experiencing a welcome softening phase, it is also facing new challenges. Insurers are becoming more selective, and the potential for catastrophic weather events looms large, reminding all involved to stay vigilant and prepared.