Inflation adds to the problems of property policy holders

Buyers of commercial property insurance should prepare well before renewal and ensure their valuations are accurate to better manage the impact of inflation on the cost of their property insurance programs.

Although rates are slowly slowing after several years of significant increases, policyholders face premium increases of up to 20% as inflation pushes up values ​​and the potential cost of losses, industry experts say.

Increased demand for construction materials and other items during the pandemic has disrupted supply chains and spiked prices that have yet to come down. Costs to rebuild and repair properties have ballooned, while labor shortages have added to the strain, they say.

A severe inflationary trend has caused a surge in values, driving up premium costs, said Gary Marchitello, chairman of Willis Towers Watson PLC’s North American real estate practice in New York.

“Even if you get a fixed renewal, your premium could go up 20% because your value base has gone up 20% due to inflation,” he said.

From the customer’s perspective, the increase in inflation is coming after several years of higher prices, Mr. Marchitello said.

“They’ve been hit with three to four years of rate increases and now they’re hit with 10-15-20% premium increases because of inflation.” It is not a happy scenario,” he said.

Risk managers understand that inflation increases premiums and that higher costs should be expected, said Manny Padilla, New York-based vice president, risk management and underwriting, at MacAndrews & Forbes Inc. and director of the board of the Risk and Insurance Management Society Inc.

“The only question is what that number is. … Some operators have done a good job of creating indices and forecasts in the future so that we can use them as a guide. Others just flip a coin and say a minimum of 15%,” he said.

Insurers are focused on managing inflation from a portfolio perspective and working with policyholders to reduce their overall cost of risk, said David Blevins, executive vice president, commercial insurance property manager at Chubb Ltd. at Whitehouse Station, New Jersey.

“As inflation rises, the costs — whether it’s restrictions, whether it’s potential labor shortages, business interruption losses — they’re all potentially at an increased severity rate,” Mr. Blevins said.

Insurers are concerned about rates and the adequacy of reserves, so there’s a renewed focus on reported values, said Martha Bain, Glendale, Calif.-based managing director of the North American property practice at Arthur J. Gallagher & Co.

“There’s some complacency in accepting rollover values ​​year after year, but they’re not accepting those values ​​anymore,” she said.

In addition, insurers also dive into the details of how values ​​are determined, often asking for third-party validation of the valuations, Ms. Bain said.

“When they don’t feel comfortable with those values, they tend to be more conservative in their signing. They offer tougher terms and conditions and often this is reflected in their prices,” she said.

Michael Williams, executive vice president of Whitehouse Station, New Jersey-based manufacturing industry practice leader commercial insurance at Chubb, said the insurer has not made decisions to reduce coverage due to inflation.

“We’re just looking, frankly, for an adequate valuation and for the insured to update the time frames accordingly,” Mr Williams said.

The assessment is not just about replacement costs, Mr. Blevins said. “It’s about how the insured deals with it and how their insurance program needs to respond,” he said.

Risk managers should review their coverage terms and conditions and ensure their policy limits and sub-limits are adequate to cover a loss in an inflationary environment, experts say.

Risk managers understand they need to pay a fair premium, but the challenge is quantifying how much they need in limits so that in the event of a loss they don’t have more uninsured than insured costs, Mr. Padilla said.

“A sublimit of $10 million 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 their facilities to address engineering risk and loss potential and prevent front-end losses, the better they can manage their overall cost of risk, he said.

Neither insurers nor policyholders want surprises, Ms Bain said. Customers should prepare well before renewal and check their estimates to make sure they’re budgeting accordingly for an increased premium, she said.

“Being able to send that message to underwriters that you take ratings seriously, that you’re focused on a data-rich value statement … really sets you apart,” she said.

If a business doesn’t want to increase its insurance values, it may face limits on how much it can recover in the event of a loss, Mr. Marchitello said.

“It’s a big trade-off — giving up coverage to save on a premium,” he said.

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