Moving into 2025, the commercial property insurance market appears to be stabilizing, and most renewals with favorable loss histories will see single-digit rate increases (non-catastrophe (CAT) exposed assets with good loss histories can expect flat to 10% rate increases). While some complex risk profiles are still difficult to place and challenges remain in high-risk areas with persistent capacity and pricing pressures (e.g., wildfire zones), the double- or triple-digit rate increases the commercial property insurance segment saw in 2023 are less common. Although the market appears to be more stable and competitive, updated CAT models may affect the risk appetite of insurers and lead to pricing fluctuations.
Developments and Trends to Watch
Natural disasters—Between October 2023 and October 2024, the United States experienced 24 weather and climate disasters that caused losses exceeding $1 billion, as reported by the National Oceanic and Atmospheric Administration. As of the third quarter of 2024, insured losses from these disasters amounted to approximately $108 billion, with severe convective storms being the primary cause. Hurricane Helene alone incurred insured losses estimated between $10 billion and $15 billion, making it the costliest event of the year’s first nine months. Moreover, projected losses from Hurricane Milton are expected to range from $30 billion to $60 billion. In total, insured losses for 2024 are anticipated to surpass $140 billion, indicating another year of substantial financial impact from natural disasters.
A stable reinsurance market and increased capacity—The reinsurance market experienced a stabilization in 2024 and is projected to recover to near-pre-COVID-19-pandemic levels. This recovery has been driven by increased involvement from capital markets through various instruments, such as insurance-linked securities, catastrophe bonds, and sidecar arrangements. This surge has led to a significant growth in available reinsurance capacity. Additionally, higher retention rates by policyholders have contributed to lower losses for reinsurers. The increased access to reinsurance capital has enabled direct insurers to offer increased capacity for renewals or new business. High-risk accounts are taking advantage of this increased capacity through shared and layered programs from international markets like London and Bermuda. In essence, insurers now have more capital available and are willing to assume portions of larger and more intricate risks, making it easier for some insureds to secure coverage.
Insurance-to-value (ITV) considerations—ITV calculations are crucial in determining the appropriate amount of property coverage. They assess an asset’s actual, market, and replacement value. However, securing an accurate ITV calculation has been challenging due to volatile factors like inflation and material costs. An accurate ITV calculation ensures a balanced ratio between insurance coverage and the estimated value of the commercial building or structure, providing adequate protection against potential losses. Common approaches to accurately estimating this value include obtaining a property appraisal from a third-party firm, leveraging adjusted fixed-asset records for inflation, or using basic benchmarking tools like dollars per square foot.
Continued interest in alternative risk financing—Alternative risk transfer options offer customized solutions and, in some cases, cost savings. Risk managers have several options, including captives, parametric coverage, and structured fronting. Captives are insurance companies formed by parent companies to insure their own risks instead of relying on third-party insurers. As natural disasters become more severe, parametric coverage has gained popularity. Under this coverage, the amount a policyholder receives is determined by the calculated intensity of the covered event rather than the exact cost of damages. Structured fronting is an insurance solution that allows insureds to manage their own risk. In these arrangements, policies are written by an insurer, but most or all the risk is transferred to the insured or another third party (e.g., a captive or reinsurer).
Tips for buyers
- Conduct a comprehensive inspection of your commercial property and the surrounding area to identify potential risk management concerns. Implement additional mitigation measures as necessary.
- Collaborate with insurance professionals to initiate the renewal process well in advance.
- Assess whether you should adjust your organization’s commercial property limits to avoid underinsuring your property and incurring coinsurance penalties. This may involve updating your total insurable values and accurately calculating Insurance-to-Value (ITV) ratios.
- Evaluate your organization’s natural disaster exposures. If your commercial property is situated in an area more susceptible to a specific type of catastrophe, implement protective measures and response strategies to safeguard your property as effectively as possible in the event of such an occurrence (e.g., installing storm shutters on windows to protect against hurricane damage or utilizing fire-resistant roofing materials to safeguard against wildfire damage).
Please contact us for more information about these trends and to request additional resources.