Ask The Expert: Are Insurance Premiums Expected To Continue Increasing For Commercial Real Estate In 2021 & What Options Are Available To Mitigate The Impact?

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Unfortunately insurance premiums for the real estate sector are expected to continue increasing in 2021.  There are 4 primary reasons for the continued “Hard Market”, which is the upturn in an insurance market cycle when premiums are increasing and capacity for coverage is decreasing.  Although all sectors of commercial real estate will feel the impact of the continued hard market in 2021, it’s expected to have the greatest impact on multifamily and hospitability.

First, we were at a very low point for insurance rates as we had previously been in an extremely soft market cycle where we experienced compounded rate decreases from 2006 to 2016.  Despite the recent rate increases over the past few years, we are still at a low point compared to where rates were in 2006.  Second, we have seen much higher loss activity in recent years with record breaking hurricane seasons, wildfires, convective storms, social inflation, and now the impact of Covid-19.  To put this in perspective, 2017, 2018, and 2019 were three of the four worst years for CAT losses on record.  Third, is that interest rates are at a record low point now and will continue to be for the foreseeable future.  Since carriers rely on the “float” of investment income, the low interest rates further diminish their profitability.  In other words, much of the rate increases charged have been offset by the lowering of interest rates.  Last is the uncertainty of the impact of Covid-19 related claims.  Although these claims won’t materialize for some time, industry experts are projecting these claims could reach as much as $100 billion.

Although the reasons for this continued hard market are outside of our control, there are options available for owners to help mitigate the impact.  Focusing on improved underwriting data of the assets, sharing of operational and risk management best practices, creative program structures, and increasing retentions when beneficial are all examples of strategies to improve results in this market.

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