Navigating the Rising Tide of Commercial Property Insurance Costs: Weather, Supply Chain, and Inflation

Weather: The Unpredictable Element

The frequency and severity of weather-related disasters have significantly increased, leading to higher insured losses. According to the NOAA National Centers for Environmental Information, there were 20 weather-related disasters with losses exceeding $1 billion in the United States between January and September 2021, compared to an average of seven such events between 1980 and 2020. Swiss Re reported that insured property losses reached about $42 billion in the first half of 2021, marking the highest figure in a decade. This unpredictability poses a significant challenge for insurers in accurately assessing and pricing risks.

Supply Chain Disruptions: A New Normal

The pandemic has disrupted global supply chains, leading to fluctuating prices for construction materials. While lumber prices saw a decline in the second half of 2021, other materials like copper saw dramatic increases. This volatility complicates the underwriting process, as insurers struggle to predict future costs. The potential for a major storm to hit a densely populated area, requiring simultaneous repairs or replacements, could further escalate costs, pushing insurance prices higher.

Inflation: A Broader Economic Concern

Inflation, which reached nearly 7 percent in December 2021, is the highest one-year increase in four decades. This economic trend not only affects construction costs but also impacts interest rates, which can deteriorate the value of fixed-income assets. The high inflation of the 1970s and early 1980s adversely affected the insurance industry, leading to weaker underwriting performance and reserve levels. Economists predict the Federal Reserve will tighten monetary policy at a faster pace to combat inflation, further influencing insurance costs.

To navigate these challenges, stakeholders should focus on developing more accurate data models, securing agreements with contractors, conducting frequent property risk appraisals, and enhancing loss prevention services. By taking proactive measures, the industry can better manage and mitigate the rising costs of commercial property insurance.