Commercial property insurance rates have shown significant growth in recent quarters, Chubb Ltd. signaling a 12% year-over-year rate increase in the third quarter of 2021. The influence of climate change on natural disasters, supply chain challenges and inflation are simultaneously contributing to push the rates higher, according to a report from Westchester, Chubb’s excess and excess wholesale lines division.
In addition to driving up rates, the problems make it harder to underwrite, according to Westchester.
In addition, inflationary pressures as well as rising labor and building material costs increase the possibility of understated replacement costs.
To reduce the negative consequences of supply chain disruptions and labor shortages following a disaster, risk managers and owners should consider entering into agreements with builders before a event from occurring in order to ensure the availability of materials and labor for the restoration work.
Understatement of asset replacement costs
The report also revealed that commercial properties are grossly undervalued when underwriting. For example, it is estimated that in November 2021, commercial properties are expected to have been undervalued for underwriting purposes by more than 30%, Westchester reported. One problem is that commercial policyholders often confuse replacement cost with the market or book value of a property, according to the report.
To correct the undervaluation, Westchester recommended more frequent and thorough real estate risk assessments that take into account more extreme weather events, potential supply chain impediments and inflation trends.
As more and more catastrophic weather and other problems persist, insurance companies should consider measures to encourage policyholders to take certain mitigating measures, such as upgrading stormwater drainage systems or installing a generator.
Finally, Westchester advised that the commercial property insurance industry should begin pricing “today’s new normal” in order to achieve accurate, fair and adequate estimation of risk.
“The insurance industry has a long history of successfully managing a variety of real estate exposures,” Scott A. Meyer, senior vice president, Chubb Group and Westchester division president, said in a statement. . “While the confluence of the three risk factors described in this document presents unique challenges, our industry is well positioned to manage them effectively and holistically. So now is the time to take a modernized and more informed approach to successfully managing these issues for the benefit of all parties involved, including agents and brokers.