Upheaval
Learn what is driving upheaval in the commercial property insurance market.
Read about three restrictive changes being made to commercial property policies.
Upheaval is the word for 2024. While the precise definition varies among dictionaries, upheaval involves major change or disturbance that causes conflict, difficulty, confusion, anger. We are surrounded by, and in some ways, mired in upheaval. When and how it settles out, nobody knows. Responsible communication of the forces driving upheaval is relevant to a properly informed audience. To that end, today’s blog addresses ongoing upheaval in the commercial property insurance market.
Most noticeably, commercial insureds are experiencing increased property premiums at renewal. In some cases, both agents and customers are confounded. The reality is that insurance companies are reacting to an imbalance in total property premiums collected vs. total property claims paid out. Increasing premiums is the simplest, most direct approach to correcting this imbalance.
What is driving upheaval in the commercial property insurance market in 2024? In a word, losses. In two words, frequency and severity. In five words, lots and lots of losses.
In recent years, commercial property insurance companies have paid out more losses that are more costly than anticipated and repeat again and again with no end in sight. It is a triple whammy that is not sustainable under the current property insurance model.
Next comes the follow-on upheaval, which is sharp change in commercial property policy terms. Insurance companies are changing property insurance contracts by reducing and restricting coverage in a number of ways. Three areas that stand out are:
- Increasing deductibles, with no option for the insured to pay more premium for a lower deductible. For example, on small commercial accounts, we are seeing deductibles raised to a minimum of $1,000. and pushing toward $2,500.
- A separate and higher deductible is being imposed for loss due to wind or hail. It is becoming more common for this separate and higher deductible for wind or hail damage to be double the deductible applicable to other covered perils.
Some companies are changing the deductible that applies to wind or hail from a dollar amount to a percentage amount, i.e. 1% or 2% of the property limit of the policy. This is substantial, as a $1,000,000. limit on a building damaged by wind or hail would carry a $10,000. deductible at 1%, or a $20,000. deductible at 2%. The practical effect of this is further impacted by the next point 3.
- Coverage for roof damage due to wind or hail is changing dramatically. New roofs may still be insured at replacement cost value. For older roofs, coverage is being modified to actual cash value (ACV). The example that follows is for illustrative purposes only.
Suppose a commercial building insured at a limit of $1,000,000. is damaged by a hail storm. The roof of the building is 20 years old. Using a 1% of property limit for the deductible (as described in 2. above), the deductible cost to the insured would be $10,000. The cost to replace the damaged roof is $200,000. Because of the age of the roof, the insurance company modified the policy from replacement cost to ACV. The insured would absorb a significant additional cost beyond the deductible for property insured on ACV basis. Assuming 40% depreciation applies (40% of $200,000. is $80,000.):
- insured’s expense = $90,000.
($10,000. deductible + $80,000. depreciation expense) - insurance company payout = $110,000.
($200,000. - $90,000. = $110,000.)
Upheaval is thriving. Richey-Barrett Insurance has no control of large-scale complexities driving upheaval in the commercial property insurance market. We do, however, recommend business owners and managers create a property reserve fund for storm damage events. Additionally, insureds should always make a point to carefully review their insurance policy at annual renewal.
Contact Richey-Barrett Insurance, a Trusted Choice Independent Insurance Agency, to discuss your commercial insurance concerns and questions.
