Clients face the hardest commercial insurance market in a generation.
Insurance concept, umbrellas in shopping cart

Surging inflation and extreme weather-related events caused record U.S. property insurance losses in recent years. The result was less deployment of capital, especially in high-risk areas, as insurers sought to limit their exposure and recoup losses. The remaining capital became significantly more costly and harder to secure. Faced with the need for more funding, as well as rising cap rates and lower values, some investors pulled out, causing developers to cancel projects. Existing owners experienced lower returns due to insurance premiums that may have doubled or tripled in one year, affecting buyers and sellers.

These conditions have made shopping for commercial property insurance an overwhelming proposition. Commercial real estate specialists who can offer creative solutions and connect owners to carriers with a high commercial property IQ will add significant value to a transaction and engender loyalty.

Rate Increases With Few Options

“The commercial property insurance market has been in chaos for the past 12 months,” says Chris Tolland, executive vice president of Foundation Risk Partners, a network of insurance agencies across 22 states with more than $5.5 billion in premiums under management.

“It is a simple supply and demand problem—a high demand for insurance with a limited number of insurers in the market,” Tolland says. “We’re seeing the full effects of a hard market cycle.” According to Tolland, market hardening has been ongoing since 2018, but buyers have really begun feeling fatigued over the past 18 months.

“Insurers have a low appetite for risk and are unable to deploy enough limit to satisfy demand,” he says. “When there is a lack of profitability, companies won’t deploy capital or will limit their exposure in certain markets or asset classes. The result is high rates and adverse risk selection.”

Gus Fonte, CCIM, broker-owner at AJF Properties Inc. in Miami, reports his insurance is up more than 100% over the last two renewal cycles despite only two claims in 30 years. “That makes it very difficult to meet debt coverage ratio if you have loans,” says Fonte, who represents REITs in the warehouse sector.

Besides the high cost, Fonte says his options are limited, estimating the number of carriers in the market has declined by 60%–70% in recent years. While Florida has a public insurance company to help those who can’t acquire private coverage, it doesn’t cover retail, warehouse or office. “National players with properties throughout the country can get better deals, because carriers are spreading their risk more widely,” Fonte says.

2024 C5 + CCIM Global Summit

NAR and The CCIM Institute’s partnership elevates your experience at the can’t-miss commercial real estate event of the year. Be seen, be heard and boost your business at the 2024 C5 + CCIM Global Summit in South Florida.

Learn more

Factors Driving Costs

Florida is not alone in insurance challenges. In 2023, the U.S. experienced 28 separate weather or climate disasters, each resulting in over $1 billion in damages, totaling $92.9 billion and driving up the cost of property insurance everywhere, according to National Oceanic and Atmospheric Administration data.

On top of weather-related events, supply chain issues have hindered projects. Steven Moreira, CCIM, CIPS, managing director of special projects at RealSource in Salt Lake City, is building 216 residential units in Henderson, Nev. He has needed to extend construction insurance twice due to a delay on electrical supplies.

“Initially, when we did this deal, construction insurance was $350,000 for the year for a $37 million construction project,” Moreira says. “Our latest policy extension cost was $640,000 for six months.” Add to this rising construction loan rates, which Moreira reports increased from 3% at origination to 8% for a two-year extension, causing investors to up their ante by $2 million to cover costs. With zero occupancy during the extended construction phase, Moreira estimates the delays have cost investors $7.8 million.

When the cost of building materials rises, so does the cost to repair and rebuild. Following a catastrophic event such as a hurricane, owners compete for limited building and labor resources, creating additional demand and further pushing up prices, including for insurance.

Reinsurance Market Improving

Losses in the primary insurance market have caused reinsurers to raise their rates to mitigate losses. During the Jan, 1, 2023, renewal period, the North American reinsurance property market saw an average price increase of 40%–60%. The outlook for the reinsurance market is brighter for 2024, however, with renewals being described as more “orderly” by industry experts. While U.S. property catastrophe reinsurance rates rose by as much as 50%, rates held steady for some clients not exposed to natural disasters in 2023, according to global reinsurance broker Gallagher Re.

Cost Management Strategies

While real estate brokers cannot change market factors, they can partner with insurance professionals who can recommend strategies to purchase adequate insurance at an affordable price when traditional coverage isn’t available or viable. Some insurance professionals have recommend these strategies:

New product or structure. Owners should look at different products and coverage structures. For example, owners with multiple assets might buy loss-limit coverage sufficient to cover probable maximum losses of occurrences versus purchasing coverage equal to total insured values. “Even if those assets are in the same region, the likelihood of experiencing a total loss from a single event, such as fire, is low,” Tolland says.

If your coverage is a master policy, ask about individual risk placements. “This can result in tremendous savings if there is a ‘stinker’ property on the policy, says Rich Michelson, president and founder of RISCO, a risk and insurance company in Louisville, Ky.

Pooling. “In a hard market, pooling is an effective way to manage risk given its ‘price smoothing component,’” Tolland says. Fonte likewise sees smaller owners pooling their properties for coverage but notes the benefits are limited if all the properties are in one area because they share the same risk. The function and regulation of a pool can vary significantly, and many are subject to rising rates.

Loan-only coverage. Fonte’s strategy has been to reduce coverage to a minimal amount or eliminate it for low-risk assets. In response, lenders may “force place” insurance, obtaining it on the owner’s behalf to cover only the loan amount. “Banks don’t like it, but they understand,” he says.

Parametric insurance. For those in markets with a significant lack of capacity or uncovered situations, parametric insurance may be an option. Payment results from the occurrence of a triggering event and the intensity of the event—not based on property damage. Parametric products are often associated with wind, fire, flood, and earthquake events. They can complement indemnity-based coverage to fill gaps or provide coverage for perils, such as pandemics, which would not be covered under a traditional indemnity program.

Manage Client Expectations

Tolland notes that insurance professionals can help prepare clients for market realities well before renewal periods. “Quotes don’t get released until the last minute, and clients experience sticker shock, even if you told them to expect rate increases,” he says.

To set expectations about current market rates, Tolland recommends that brokers develop relationships with multiple carriers so that they can provide their clients access to the broadest range of options, as well as personalized, competitive quotes.

Michelson encourages brokers to do their homework identifying insurance carriers. “You need to pick your agent based on their insurance IQ and past successes,” he says. Also, brokers should ask about underwriting relationships, length of representation, premium volume with a specific carrier and ratio loss.


Role of Public Adjusters for Claims

The rise in claims due to weather-related events and losses to insurance companies has raised the profile of public insurance adjusters—individuals who advocate for the property owner with the insurance company. Owners often face the “delay, deny and defend” tactic used by some insurers to minimize their losses, says RISCO’s Rich Michelson, who works as both a public adjuster and traditional insurer (never for the same claim).

Michelson tells of an Oklahoma shopping center settlement that went from the insurance company’s initial offering of $16,000 (after deductible) to $480,000 at cash value and $640,000 at replacement cost.

Owners’ gains are often more modest, he notes, but he believes public adjusters, who receive a percentage of the settlement, almost always secure a larger amount for a client.

Adjusters are regulated at the state level, and not all states allow them to obtain licenses. In Florida, for example, legislative battles recently arose regarding whether the involvement of lawyers and public adjusters in claim settlements drives up insurance costs. Some insurers have begun putting public adjuster exclusions into their contracts.

Public adjusters and insurers need not be at odds, says Michelson. “Good adjusters are happy to work with another professional to work out the claim.”

About Create

Create is a quarterly publication for commercial practitioners, members of the National Association of REALTORS® and commercial real estate industry leaders. Members can subscribe by updating your member profile information to include commercial interests in the "Field of Business" list.

Update your Field of Business in your member profile.