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Commercial property insurance buyers should prepare well in advance of renewals and ensure their valuations are accurate to better manage the impact of inflation on the cost of their property insurance programs.
While rates have been moderating slowly after several years of substantial hikes, policyholders face premium increases of up to 20% as inflation pushes up values and potential loss costs, industry experts say.
Increased demand for construction materials and other items during the pandemic led to supply chain disruptions and soaring prices that have yet to fall. Costs to rebuild and repair properties are inflated, while labor shortages have added more strain, they say.
The severe inflationary trend has caused a spike in values, which is adding to premium costs, said Gary Marchitello, chairman of Willis Towers Watson PLC’s North American property practice in New York.
“Even if you get a flat renewal your premium could go up 20% because your value base has risen 20% due to inflation,” he said.
From the client’s perspective, the increase in inflation comes after several years of higher pricing, Mr. Marchitello said.
“They got hit with three to four years of rate increases and now they’re being hit by a 10-15-20% premium increase because of inflation. It’s not a happy scenario,” he said.
Risk managers understand that inflation increases premiums and that higher costs are to be expected, said Manny Padilla, New York-based vice president, risk management and insurance, at MacAndrews & Forbes Inc. and a Risk and Insurance Management Society Inc. board director.
“It’s just a question of what that number is. … Some carriers have done a good job of creating indexes and projections in the future so we can use it as a guide. Others are just basically flipping a coin and saying 15% minimum,” he said.
Insurers are focused on managing inflation from a portfolio perspective and working with policyholders to mitigate their total cost of risk, said David Blevins, executive vice president, commercial insurance property manager, at Chubb Ltd. in Whitehouse Station, New Jersey.
“As inflation increases, costs – whether it’s limits, whether it’s potential labor shortages, business interruption losses – they are all at an increased rate of severity potentially,” Mr. Blevins said.
Insurers are concerned about rate and reserve adequacy, so there is a renewed focus on reported values, said Martha Bane, Glendale, California-based managing director of the North America property practice at Arthur J. Gallagher & Co.
“There has been some complacency with accepting rollover values year after year, but they are not accepting those values anymore,” she said.
In addition, insurers are also diving into the details of how values are determined, often asking for third-party validation of the valuations, Ms. Bane said.
“When they’re not comfortable with those values they tend to be more conservative with their underwriting. They offer more onerous terms and conditions, and often it’s reflected in their pricing,” she said.
Michael Williams, Whitehouse Station, New Jersey-based executive vice president, manufacturing industry practice leader, commercial insurance, at Chubb, said the insurer has not made decisions to cut back on coverages because of inflation.
“We are just looking for, frankly, adequate valuation, and for insureds to update time frames accordingly,” Mr. Williams said.
Valuation is not just about replacement costs, Mr. Blevins said. “It is absolutely about how insureds manage through this and the way their insurance program should respond,” he said.
Risk managers should review their coverage terms and conditions and ensure their policy limits and sublimits are adequate to cover a loss in the inflationary environment, experts say.
Risk managers understand they must pay a fair premium, but the challenge is to quantify how much they need in limits so that in the event of a loss they don’t have more expenses that are uninsured than are insured, Mr. Padilla said.
“A $10 million sublimit with inflation actually becomes 80% if it’s a 20% inflation factor, so I have to increase that sublimit to make sure I’m adequately accounting for inflation on my side of the equation,” he said.
Loss prevention is critical, Mr. Blevins said. The more a policyholder can manage its facilities to address risk engineering and the potential for loss, and prevent losses on the front end, the better they can manage their overall cost of risk, he said.
Neither insurers nor policyholders want surprises, Ms. Bane said. Clients should prepare well in advance of renewals and verify their valuations to ensure they budget accordingly for increased premium, she said.
“Being able to deliver that message to insurers that you are taking valuations seriously, that you are focused on a data-rich statement of values … really sets you apart,” she said.
If a business doesn’t want to increase its insured values, it might face limitations on how much it could recover in the event of a loss, Mr. Marchitello said.
“It’s a big trade-off — giving up coverage to save premium,” he said.