Advisen

As commercial property rates climb for CAT-exposed zones, brokers counsel clients

By Alex Zank, Advisen

Catastrophes continue to shape the commercial property insurance market, driving up premiums for clients with relatively high exposure or pricing them out altogether. In response, insureds are employing strategies to make themselves more palatable to underwriters, keep prices down, or find alternative sources of coverage, brokers say.

In recent market outlook reports, several brokerages have predicted commercial property insurance rate increases anywhere between 5% for lower-risk accounts up to 25% or more for those buyers with the most exposure to catastrophes.

Mark McEvoy, property practice leader with Woodruff Sawyer, said he expects some rate hikes to moderate due to insurers reaching rate adequacy after an extended hard market.

“When that starts to happen, you’re going to start to see either a slowing down of rate increases, [or] it could potentially lead in some circumstances to flat rates or rate reductions,” he told Advisen.

Natural disasters could upend those expectations for 2022. McEvoy said it is tough to predict the next 12 months without knowing how many catastrophes will occur, and how costly they will be.

“We’re seeing an uptick in the number of events, [and] we’re seeing an uptick in the cost of the insured loss in those numbers of events, as well as the economic cost of those events,” he said.

Similarly, Wes Robinson, national property president of Risk Placement Services (RPS), said in a recent report that rate increases should moderate, but not for catastrophe-exposed accounts.

Extreme weather events took a $343 billion economic toll last year, with just 38% of the total insured, according to an Aon report. 2021 finished off with tornadoes ripping across parts of the southern and central U.S. and wildfires burning in Colorado.

According to Chip Stuart, North America real estate practice leader with HUB International, insurers spent the past two years pruning their books of less desirable risks.

“They have established appetites now, where they pretty much say, ‘This is what we’re looking for,’ and if you fit that, you’re going to have some success with that insurer,” he said.

Stuart said clients with catastrophe exposure won’t find much, if any, options in the standard market and usually need to turn to the excess and surplus (E&S) market. Even in the higher-risk market, insurers now offer lower limits and clients need to layer coverage to build their programs.

Some carriers are also considering increasing deductibles or requiring percentage deductibles for wildfire coverage, McEvoy said. They have traditionally used percentage deductibles on earthquakes and hurricanes, and more recently have added them for hail and tornado damage in certain areas.

“It’s not a standard,” McEvoy said, adding, “These are just discussions that continue to come up.”

Prices have risen to the point where traditional property insurance no longer makes financial sense for some organizations, HUB’s Stuart said. Captives can offer an alternative to insurance.

“On the retail side here at HUB, we’re having a lot of discussions about captives, where insureds will probably want to band together like-kind insureds in different geographical areas, and they’ll put together some type of insurance,” he said.

Stuart said creating a captive is a long-term strategy, since insureds are essentially forming their own insurance company. But it may be the best option for those who are exposed to catastrophic perils.

There are other steps policyholders can take to mitigate their risk, and brokers focus on helping clients make their case to underwriters.

Carriers want as much information as they can get on properties they’re insuring, Stuart said. This would include age, fire protection and building use. If any information is missing, underwriters will default to the worst-case scenario, he said.

McEvoy said actions include installing sprinklers in buildings, training staff for fire response, and creating a business continuity plan for quickly transferring production to other locations in case one facility goes offline. Companies may also want to think more about the catastrophe exposure of a property before acquiring it or building on it.

Journalist Alex Zank can be reached at alex.zank@zywave.com