Commercial Insurance Rates are Skyrocketing

Why Are Commercial Insurance Rates Skyrocketing For Condominiums?

By now, you’ve probably noticed that your condominium association’s commercial property insurance rates have risen steadily over the last several years. We hate to be the bearer of bad news, but unfortunately, commercial insurance rates are continuing to trend upwards — and they aren’t showing signs of slowing down anytime soon. 


There are several variables currently creating the perfect conditions for high commercial insurance rates. We know this is unwelcome news to say the least, but this article will provide some insight into the driving factors behind the price hikes, as well as best practices for navigating the shifting landscape of rising insurance rates.

Why Are My Rates Shooting Through The Roof? 


There are several factors playing into the soaring costs of commercial insurance, many of which are intertwined with each other. These are some of the most prominent: 


  • Climate change is accelerating unpredictable weather events.


Rising temperatures fuel extreme weather events that lay catastrophic waste to properties, impacting the risk insurers must reckon with. The United States alone has faced a barrage of extreme weather events induced by climate change in recent years; California has weathered blazing wildfires, Texas has faced unprecedented cold snaps, and several midwestern states have been pummeled by hefty tornadoes. 


As weather-related losses pile up, insurance companies are adapting with higher insurance rates. In the first half of 2021, disasters inflicted a whopping $42 billion in losses covered by insurance. Climate change is now recognized as the number one long-term risk that exists for insurers, meaning that costs will continue to rise until the effects of climate change are mitigated.


  • Covid-19 continues to drive global supply chain disruptions. 


In early 2020, factories in global manufacturing hubs like China, South Korea, Vietnam, and Germany were forced to shutter or reduce production as workers got sick. In response, shipping companies cut their schedules in anticipation of a drop in demand for moving goods around the world. When demand returned almost as quickly as it fell, suppliers and shipping companies couldn’t keep up, creating a sudden lapse in supply in what’s known as the “bullwhip” effect.


As supply chain disruptions become more common, interest in comprehensive insurance coverage to protect against supply chain risks also increases. Reports suggest that the supply chain imbalance is taking longer than expected to normalize, meaning that the availability of commodities and building materials (discussed below) may remain a problem well into 2022, contributing to further price increases.


  • Construction costs are hiking due to the supply chain crisis and rising inflation.


A strained supply chain creates limited access to construction materials. That means there are fewer resources to rebuild property touched by fires, floods, or other property damages. Coupled with rising inflation, the increase in construction material costs equals even higher commercial insurance property rates.


To put the price hikes in perspective, consider that the price for a standard 1,000 board feet of lumber soared from $347 to $1,675 between May 2020 and May 2021. Overall, the cost of all construction materials increased 23.1% between August 2020 and August 2021 — and they’re anticipated to rise another 5-11% through August 2022.


  • Undervaluation creates inadequate rates.


Given the rising cost in construction materials and high inflation rates, it’s likely that asset replacement costs are currently being undervalued in property underwriting models. This negatively affects insurer modeling and pricing, as well as the duration of claims adjustment and payments. 


It’s up to insurance brokers to collaborate with their clients to determine accurate values of not only commercial property itself, but of the assets contained in the property to determine accurate replacement cost valuations. 


  • Global insurance demand is rising overall.


Since the onset of the pandemic — and given the increase of extreme weather events worldwide — businesses and consumers have overall become more risk-conscious, driving the demand for commercial insurance skyward. 

How To Adapt To Rising Premiums


Though many of the factors listed above are out of the control of property owners, there are several possibilities to effectively weather rising insurance costs.


For starters,condominium associations should perform upgrades to their properties to lower their insurance premiums, like installing code-compliant mechanical, electrical, and plumbing systems, seismic retrofits, and roofing fixes. Aged building components, like wiring, plumbing, and roofing, are all major red flags during the underwriting process and drive up your rates. In addition, be aware of your building’s fire exposures. Help ensure your property performs well during a risk inspection by making sure you have functioning emergency lighting, signs and maps showing emergency exit areas, and properly maintained fire and life-safety equipment. Wood-frame construction buildings are more susceptible to fire losses, so limiting the number of known hazards throughout the property is key. 


Additionally,condominium associations should actively seek out more frequent and higher-quality replacement evaluations. This will ensure more accurate and comprehensive underwriting of a building’s replacement value. But building owners aren’t the only ones who should adapt to the current landscape; insurance companies need to start pricing for the current reality to achieve accurate and fair pricing of risk.


Final Thoughts


The issues that lead to higher insurance costs are complex and, unfortunately, deeply interwoven with one another. There is no one easy solution, but insurance companies and property owners alike can mitigate the effects of rising costs by doubling down on ensuring replacement valuations remain accurate and keeping property up to code.  


As the commercial property market continues to face complex and historic challenges, condominium associations, through their boards, deserve a trusted partner capable of helping them navigate the quickly-evolving landscape of commercial property management. That’s what Rise Association Management Group is here for. Our team is ready and available to help you discover risk mitigation and management solutions for your condo association. You can get in touch with us here — we look forward to meeting you!