Many industries and sectors are feeling the force of the hardening insurance market as premiums continue to rise, with both privately owned and strata registered commercial and industrial properties among the most impacted. This article explains what is fuelling the premium increases, how different risks are assessed/priced, and steps to make your risk profile more appealing to insurers.
CURRENT MARKET CONDITIONS
First, it is important to understand the market forces at play. The lower premiums collected in the prior soft market (where insurance was relatively cheap and plentiful) means insurers have suffered underwriting losses where claims paid are similar to or higher than the premium collected.
Making matters worse, property losses have continued to grow, as evidenced by recent flood, bushfire, hail/storm, and cyclone losses. With such large catastrophic losses across the globe, the cost of purchasing reinsurance (insurance for insurers) rises. In turn, insurers raise their premium rates and become more selective in their underwriting guidelines to regain profitability.
Right now, commercial property premium increases are trending between 15-20% for commercial strata, between 5-10% for non-strata commercial buildings, and increases can be upwards of 20% for industrial buildings. Changes in risk information, hazard or high-risk occupants, and poor claims history can push these rates even higher.
WHY ARE PREMIUMS INCREASING FOR COMMERCIAL & INDUSTRIAL PROPERTIES?
The hardening market is driving insurance rate increases and restricting appetite to underwrite commercial/industrial risks. Many insurers who could previously write high-risk commercial and industrial buildings have experienced a significant influx of claims. As a result, they have adopted a more conservative approach and are re-evaluating their risk appetite/rates to reduce their overall exposure. Consequently, underwriters are either not offering renewal or applying large rate increases and additional excesses/deductibles.
Tenants and Occupiers are a major factor in insurers’ risk assessments, in combination with the construction material and fire safety measures in place at the property (see Figure 1). COVID-19 has contributed to a surge in the volume of premises left vacant and unoccupied for an extended period. As shown in figure 1, underwriters view unoccupied lots as more likely to incur malicious damage and theft.
There are now fewer Insurers in the high hazard commercial property market and those remaining have narrower risk appetites. Over the last five years, three strata insurers and at least three specialist property insurers have exited or significantly reduced their exposure to commercial property risks. Reduced competition limits the “capacity” or amount of risk each insurer is willing to hold in any one risk or location. This is particularly evident for hard-to-place risks, such as properties in alpine regions, where there are far fewer insurers prepared to offer terms. Further, if the sum insured is above approximately $5 million, those same insurers may not be able to write 100% of that risk. In turn, the request for a quote may be declined, or sometimes, multiple underwriting agencies will need to insure a percentage of the risk.
HOW IS RISK ASSESSED?
The chart below shows how risks are typically viewed by insurers, with the greater risks most likely to attract higher premiums.
HOW TO LIMIT PREMIUM INCREASES
Insurers appreciate owners that are proactive in their approach to risk mitigation. It instills confidence that the property owner or manager is overseeing and limiting risk effectively. Here are our tips on how to make your property more attractive to insurers:
- Property maintenance: Make sure a maintenance plan is in place and always adhered to. It is prudent to have an annual preventative maintenance budget for the property. This allows urgent repairs and proactive maintenance to be carried out. A professional property manager can assist by overseeing the maintenance fund and engaging with industry experts to maintain the property.
- Fire safety upgrades: Ensuring you are meeting your mandatory council fire safety obligations is a must, however, going beyond the minimum requirements is encouraged by insurers. If the property is leased, ensure the tenants have adopted best fire and safety practices for their industry.
- Engage a risk engineer/surveyor: A professional risk engineer can identify hazards and provide recommendations to improve the property’s risk profile. They provide feedback on fire protection, storage suggestions, maintenance, and overall best practice to minimise risk and liabilities.
- Keep your broker updated: Inform your broker about any enhancements or steps taken to reduce risk at the property. This can be done at any stage but will be most beneficial leading into renewal. This information will assist the broker in their negotiations of terms with both the holding underwriter and alternate markets.
Author: Chris Glass, State Manager – QLD, Honan Insurance Group