November 17, 2022

Outlook 2023: Today’s industry trends will impact next year’s property insurance rates

Floyd

High vacancy and inflation rates, rising construction costs and a greater frequency of property claims aren’t going to go away in 2023. For this reason, real estate owners and operators will want to position their portfolios in a way that reduces risk while creating a better risk profile ahead of the 2023 renewal. Here are some of the top trends that will continue into next year and how your business can combat their risks.

Tighter profit margins demand strong risk management.

Several years of high rebuilding costs and outdated or inaccurate property valuations, rising crime, chronic inflation and high interest rates will continue to challenge real estate profits.

Climbing interest rates have made loans and refinancing more expensive; rates are likely to stay high and increase in 2023. Real estate owners and managers will need to plan for further rate hikes and continued high inflation, which will make it more difficult for their commercial and residential lessors to make rent.

The shift to remote work will continue to pressure commercial real estate profits as well. The national vacancy rate for office buildings rose steadily throughout the first half of 2022, standing at 18.4% in the third quarter 2022.

These factors will make an already onerous insurance market even more difficult in 2023, as property carriers pull back on capacity and increase insurance rates.

What can businesses do?

• Lean into your risk. Higher interest rates and increasing catastrophes have driven up risk for real estate owners and investors. A higher deductible reduces premiums and improves experience rating.

• Increase your risk management tactics. Carriers are more likely to offer coverage for properties where the owners or operators are actively trying to prevent damage or liability claims. Underwriters will target best-in-class properties and will require current building valuations before even considering risks.

Rising building costs and litigation call for more strategic positioning.

Commercial property-casualty insurance is projected to increase as much as 20% in most regions throughout the United States. The rise will be due to carriers’ increased scrutiny of insurance-to-value, rising construction costs and supply chain disruptions. Expect coverage for habitational and multifamily properties to rise about the same amount.

There are bright spots for top properties with lower risk profiles. For instance, underwriters are still offering coverage for fire-resistant Class A high-rise office buildings. Best-in-class property risks will find good coverage at a good rate.

Claims litigation also threatens real estate owners as the number of so-called nuclear verdicts (awards of $10 million or more) will increase. These lawsuits, such as one that awarded $43 million because of a crime that happened in the parking lot of a drugstore, may drive carriers away from insuring sectors such as older multifamily properties or properties in high-crime areas.

When coverage is available, it will be significantly less than what is needed to adequately protect the property owner, or board of directors, in the event of a lawsuit.

What can businesses do?

• Analyze your loss trends. Understand the root causes of large losses and explain to carriers what you’re doing to prevent future claims. Develop a strategy to determine the best time and frequency to review alternative markets.

• Keep a paper trail. To obtain more preferable rates, real estate owners and operators will need to have detailed data on renovations and maintenance, such as new roofing or plumbing. Otherwise, insurers will assume that buildings have no renovations and will price insurance accordingly.

• Make safety a priority. Nuclear verdicts against real estate companies are exploding. Make safety a tenet of the organization, with extra training and risk management practices for all properties. A little prevention can save you millions.

Weather disasters will continue to adversely affect commercial real estate coverage.

Hurricane Ian, which recently slammed into Florida’s southwest coast, causing between $42 billion and $57 billion in damage, is just one of the catastrophes weighing heavily on insurers’ minds. Global catastrophe losses in 2021 totaled $105 billion and estimated insured losses reached $35 billion in the first half of 2022 alone. For this reason, coverage for catastrophic perils will rise 20% to 50% in low-hazard areas, while in high-hazard areas, rates could triple.

If a property does suffer a loss, underwriters are more likely to consider coverage if they have been rebuilt with proven construction materials to mitigate against future losses.

What can businesses do?

• Use better materials. Whether it’s rebuilding or new construction, it’s important to use materials and construction techniques that will minimize losses later on. Think hail-resistant roofing and siding, fire-resistant building materials and automatic plumbing shut off controls. It will go a long way in lowering claims and premiums.

• Consider a parametric policy. Parametric insurance may be available in areas where property insurance capacity is scarce. Parametric policies pay out a set amount based on the magnitude of the event, even if there is no loss for the insured.

ONWARD AND UPWARD

Despite multiple industry challenges heading into 2023, real estate businesses have an opportunity to reduce their risk and potentially even their premium rates by increasing their diligence in risk management efforts. Work together with your broker and carrier to find the right formula that will increase your resilience to the blowing winds.

Greg Floyd is senior vice president of commercial lines at insurance brokerage Hub International out of Washington. He specializes in condominium association insurance and risk management. He also is the practice leader of the Northwest habitational specialty group, which services over 700 community associations in the region.

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