What's propelling commercial property rates?
Inflation and rising costs for labor and building materials are increasing the possibility for undervalued building replacement costs.
Commercial property insurance rates have shown significant growth in recent quarters, with Chubb Ltd. reporting a 12% year-on-year rate increase in the third quarter of 2021. Climate change’s influence on natural catastrophes, supply chain challenges and inflation are working concurrently to push rates higher, according to a report from Westchester, Chubb’s wholesale excess and surplus lines division.
In addition to driving up rates, the issues are making underwriting more challenging, according to Westchester. Further, inflationary pressures along with rising costs for labor and building materials are increasing the possibility for undervalued replacement costs.
To reduce negative consequences from supply chain crunches and labor shortages in the aftermath of a catastrophe, risk managers and property owners should consider entering agreements with builders before an event occurs to ensure the availability of materials and manpower for the restoration job.
Undervaluing property replacement costs
The report also revealed that commercial properties are being vastly undervalued during underwriting. For example, it is estimated that commercial properties were undervalued for underwriting purposes by more than 30% in November 2021, Westchester reported.
To rectify undervaluation, Westchester recommended more frequent and in-depth property risk appraisals that take into account more extreme weather events, potential supply chain hurdles and inflation trends.
As more catastrophic weather and other issues continue to persist, insurance companies should consider measures, such as premium discounts or credits, to encourage policyholders to take certain mitigation steps. These mitigation steps could be retrofitting storm drainage systems or installing a generator.
Finally, Westchester reported the commercial property insurance industry should start pricing for “today’s new normal” to realize accurate, fair and adequate estimating of risks.
“The insurance industry benefits from having a long history of dealing successfully with a variety of property exposures,” Scott A. Meyer, senior vice president, Chubb Group and division president of Westchester, said in a release. “While the confluence of the three risk factors described in this paper presents unique challenges, our industry is well positioned to handle them effectively and in a holistic manner. Thus, the time is now for a modernized and better-informed approach to successfully manage these issues for the benefit of all parties involved, including agents and brokers.”
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