Commercial Property Insurance Premiums Spike a Record 20.4% in Q1

When a resident placed a burned candle in their trash can and then left the apartment it sparked a fire that completely destroyed the unit. Even worse, four other nearby units suffered fire, smoke and water damage.

Marc Gordon, principal and CFO of Investors Management Group, was left with a $400,000 bill for damage plus loss of rents. So naturally he contacted his insurance company.

His conclusion? “We would have been better off having just paid the cost of the damage out of pocket, after accounting for the increased premiums over several years,” Gordon said.

His insurance costs tripled.

“If there has been a reasonable size claim at a property, the insurance can double or triple until that claim is off the loss runs, which takes three to five years,” he said.

Apartment operators have been complaining about skyrocketing property insurance premiums for years and in truth these high costs have affected just about every facet of commercial real estate. Premiums have been rising by double digits many markets with some renewing policies offer half the coverage for that same full price.

The first quarter of 2023 was no different and in fact worse than usual. The Council of Insurance Agents & Brokers reports that the average increase in commercial property premiums spiked to 20.4%, which is the first time since 2001 that this line recorded an increase higher than 20%.

Eighty-five percent of respondents also reported that capacity decreased further for property insurance, a decrease that almost half of that number described as “significant.” Several respondents also reported that carriers put an increased focus on an account’s loss history, to the point that some accounts with higher loss frequency faced non-renewal.

Underwriting has also tightened, particularly for properties on the coast or in an area prone to natural catastrophes, such as wildfires.

One respondent said carriers pushed for “review and updating of replacement values along with current updates to the property, i.e., roof, electrical.” Another respondent from the Southeast said alongside those changes, the “age of the building impacted acceptability” for underwriting. And on the other coast, a respondent from a midsize Southwestern firm pointed to broader trends of “significant terms and conditions changes, larger deductibles, more significant exclusions, and reduced coverage” for the line.

Driving the Trend

Inflation and natural catastrophe were once again the main drivers of this pricing trend, according to the respondents.

“Property has been impacted the most by inflation,” said one respondent from a large Midwestern firm. A respondent from a large Northeastern firm said the “cost of repair, extended loss of use, and supply chain issues with materials have all contributed unfavorably to ultimate claim cost trends.”