Weather, supply chain, and inflation increase the cost of commercial property insurance.

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The underwriting and price of commercial property insurance changed in 2021 due to the sharp increase in the cost of construction materials.

Westchester, Chubb’s excess and surplus specialist product department, recently released a paper outlining the reasons behind increased commercial property insurance rates as well as potential solutions.

 

According to the research, there are three key causes of the increase:

 

significant weather-related insurance losses that are more frequent and severe;

 

Construction material costs have increased due to a supply chain crisis and rising inflation, which in December 2021 reached about 7% compared to the same month the previous year, the highest one-year increase in the preceding 40 years.

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severe and unpredictable weather

 

20 weather-related disasters with losses in excess of $1 billion happened in the United States between January and September 2021, according to NOAA National Centers for Environmental Information.

The average number of these losses between 1980 and 2020 was seven.

 

According to Swiss Re, the insurance industry reported insured property losses totaling roughly $42 billion in the first half of 2021, the biggest amount in ten years.

 

The catastrophic risk models “may not adequately represent the possible losses owing to unexpected weather occurrences like the December 2021 tornado outbreak, Hurricane Ida, and Winter Storm Uri,” according to the research, despite this sharp increase in losses.

For insurers attempting to foresee hazards related to commercial properties, the unpredictable nature of these storms and the need for better hydrological, topological, and geospatial data gathering and analysis continue to be a danger.

 

chain of supply

 

Due to the pandemic’s disruption of the worldwide supply chain, 2021 also saw price adjustments for a variety of goods, particularly those utilized in construction.

According to the research, although the high lumber prices decreased in the second part of the year, the cost of supplies like copper pipe and tubing sharply soared.

For the sake of underwriting and pricing, this made it difficult for insurers to estimate future expenses.

 

Thousands of homes could need to be repaired or replaced at once if an unanticipated severe storm strikes a densely populated area, driving up the price of supplies, labor, and, eventually, insurance.

According to the research, commercial properties were thought to have been undervalued as of November 2021.

 

Inflation

 

Underwriters are concerned about the overall inflation picture and its potential influence on interest rates in addition to cost hikes brought on by the epidemic.

 

The research notes that, for instance, “high inflation in the 1970s and early 1980s significantly damaged the industry, resulting in lower underwriting performance and reserve levels.”

On the other side, “rising interest rates weakened the value of fixed income assets.”

According to economists surveyed by Reuters recently, the U.S. Federal Reserve would tighten monetary policy faster than they anticipated a month ago in order to combat stubbornly rising inflation.

 

What’s the next step for us?

 

The research from Westchester suggests a number of tactics to assist reduce rising commercial property insurance costs:

 

The development of more precise and near-real-time data on building conditions, drainage systems, real estate trends, and accessibility to construction materials and labor is required by insurers, reinsurers, modeling companies, brokers, and risk managers;

 

In order to ensure more thorough underwriting of a building’s replacement value, more frequent and thorough property damage risk appraisals from qualified sources are required; Insurers should consider upgrading loss prevention services provided to commercial property owners and rewarding them for their efforts. Risk managers and property owners should consider entering agreements with contractors before weather events to ensure that materials and services are available when the need arises.

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