Property Insurance for 2023
Inflation leads to higher property values
by Andy Shafer
Of all the insurance lines available for businesses, property insurance is the most globally interconnected, due to “reinsurance.” This is actually insurance that insurance companies purchase on their book of business. In layman’s terms, this means that the insurance carriers you know by name purchase reinsurance for a large portion of their total property exposure.
As an example, let us say that there is a $20,000,000 building insured with ACME Insurance company. Of that $20,000,000 limit, ACME may actually take on the first $5,000,000 of risk, and then buy reinsurance on the remaining $15,000,000. With this global interconnectivity, all sorts of natural disasters around the world affect property prices here in East Tennessee. Wildfires in California, record-breaking blizzards in Colorado, and hurricanes in Florida affect what we pay for property coverage here. Since all carriers purchase reinsurance at some levels, the loss experience for these reinsurance companies is priced into property premiums that we pay. It is worth noting that for the last five years, the property market has not performed well across the industry. The recent Hurricane Ian in Florida has destroyed any chance of profitability from the past five years.
So what do we expect in 2023? The majority of reinsurance renewal terms are negotiated on a calendar year basis. That means those negotiations are taking place right now. But through our research, we’re being told by our property brokers’ insurance carriers that they are indicating a 10-15% increase on “normal property.” Could be 20-30% increases on any property with “issues” (Vacant, dangerous occupancies, prior losses, etc.) Anything with a CAT exposure, i.e., coastal, could be a 50-100% increase in premium.
Another aspect all insurance carriers are keeping front of mind is insurance to value. As we all know, everything costs more than it did last year. Building materials have especially been hit with inflationary pressures, which means the cost to rebuild now is much higher. In addition to it taking longer due to supply chain issues. Which means insurance carriers are looking into valuing property by updating property values. As an example, an office building that for years has been properly insured at $150 a square foot could now cost up to $250 a foot for the exact same structure. In our next blog, we’ll give you some examples of cost estimates for you to think about.
We are keeping a watchful eye on what is happening, and will keep you posted after the 1:1 renewal of insurance. We will advise on what you can budget for if there is any type of rating increase.
* Property loss exposure. A condition that presents the possibility that a person or an organization will sustain a loss resulting from damage (including destruction, taking, or loss of use) to property in which that person or organization has a financial interest. – The Institutes
** Reinsurance is also known as insurance for insurers or stop-loss insurance. Reinsurance is the practice whereby insurers transfer portions of their risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large obligation resulting from an insurance claim. The party that diversifies its insurance portfolio is known as the ceding party. The party that accepts a portion of the potential obligation in exchange for a share of the insurance premium is known as the reinsurer. – Investopedia