How Much is Commercial Property Insurance? Key Cost Drivers

What drives commercial property insurance costs?

Commercial property insurance protect your physical real estate investments, but rising premiums can be challenging to navigate without knowing what drives these costs. By breaking down the factors influencing premiums, you can take proactive steps to manage costs effectively.

Both internal risks within your portfolio and external market forces heavily influence rates. Understanding these elements — from property-specific characteristics to broader industry trends — can empower you to make informed decisions about your insurance strategy. This article examines the drivers behind commercial property insurance rates so you can be prepared.

Factors influencing your commercial property insurance costs

Understanding and managing commercial property insurance costs starts with recognizing the internal risks that exist within your portfolio. By identifying these risks, you can proactively address vulnerabilities and optimize your insurance strategy.

Property-specific characteristics of your asset/portfolio

The characteristics of your property or portfolio play a significant role in determining commercial property insurance costs. Insurers evaluate several key factors, including:

• Construction type: The materials used in the construction of your building, whether combustible or non-combustible, affect the risk profile. Non-combustible materials, like concrete or steel, typically yield lower insurance premiums due to reduced fire risks. Conversely, wood-frame assets are routinely significantly more expensive.
• Sprinkler systems: The presence and type of sprinkler systems increasingly matter. Systems designed to save lives or protect the building can significantly impact insurance rates. Properties with modern, functional sprinkler systems designed to protect the building, not just buy time for occupant evacuation are considered less risky.
• Building age: Newer buildings generally meet or exceed updated safety codes, making them less risky to insure. In contrast, older properties may come with outdated infrastructure, or lesser materials increasing the likelihood of claims.
• Data quality: Accurate and comprehensive underwriting data about your property, including construction details, engineering specifications, and asset updates such as roofs and HVAC systems, helps insurers evaluate risk more precisely, potentially leading to more favorable pricing.
• Asset type: The intended purpose of a property affects its risk profile. Office spaces, residential properties, or industrial sites carry different risks based on usage and occupancy, beyond their construction type or geography.

Loss history

Loss history is a key factor in determining insurance costs. Insurers use it to gauge the risk of insuring your property. A transparent and comprehensive record of past claims can demonstrate stability and reduce perceived risks. Insurers will look for:

• Performance of the asset: Properties with frequent claims may be seen as a loss leader, contributing to higher premiums. Conversely, stable performers with minimal claims often receive more favorable rates.
• Access to loss data: Comprehensive and transparent loss history helps insurers price policies accurately. Insurers may assume higher risks without this data, resulting in increased premiums. This should be considered when purchasing an existing asset; historical loss data must be requested prior to taking title.

Exposure to catastrophic (CAT) events

Exposure to catastrophic weather events (CAT) risks significantly impact insurance costs. Traditional and emerging risks insurers will look for include:

• Traditional CAT risks: Properties in areas prone to windstorms, flooding, earthquakes, and more will likely face higher premiums due to increased claims probability.
• Emerging and expanding risk areas: Events, such as convective storms (severe thunderstorms and tornadoes), and wildfires are becoming more prevalent and increasing the risk potential.

Other risk indicators

Insurers evaluate various additional factors that can influence your premiums. These factors often highlight vulnerabilities or strengths within your properties that might not be immediately obvious, such as:

• Crime scores and neighborhood safety: Properties in safer neighborhoods typically cost less to insure. Insurance companies will identify the crime and arson records within your geographic area as a matter of routine underwriting.
• Water damage risks: Aging pipes and infrastructure issues increase the likelihood of costly water damage claims. Increasingly, newly built assets transitioning to operational property insurance are experiencing water damage claims.
• Weather-related risks: Snow, freezing, and pipe bursts can lead to significant damage, especially in colder climates.
• Diversification: Policies covering a single asset or a single type of asset may be considered riskier than a diversified portfolio with a broader spread of properties.

Insurable value of your property

Insurable value refers to whether your reported property value accurately reflects the cost to rebuild in case of a total loss. Historically, underreported values have led to significant challenges:

• Impact of underreported values: In the event of a property damage claim, when reconstruction costs exceed reported or insured values, insurers face higher payouts than anticipated, often resulting in rate increases for underinsured properties.
• Increased insurable values: To address this issue, insurers scrutinize cost-per-square-foot valuations more closely. While this helps ensure adequate coverage, it can also increase premiums, especially for properties with frame construction that may have been historically underreporting or undercalculating replacement cost.

External factors influencing commercial property insurance costs

External forces play a significant role in shaping your commercial property insurance costs. Unlike certain factors within your control, these industry-wide, national and global dynamics can increase premiums regardless of individual property characteristics. Understanding these influences can help you anticipate market shifts and plan for changes in your commercial property insurance rates.

Insurance industry trends

Broader industry trends significantly influence commercial property insurance rates. These include:

• Profitability of insurers: When insurers experience sustained underwriting losses, they adjust premiums to compensate. If claim payouts consistently exceed collected premiums, rates rise.
• Shift in market conditions: Over the past decade, the market has shifted from a buyer’s market to a seller’s market. Insurers now apply stricter underwriting standards and better data from insureds leading to premium increases for many policyholders.

Reinsurance dynamics

Reinsurance plays a crucial role in determining insurance costs. It’s the coverage that insurers purchase to cover significant loss events, and its pricing directly impacts primary insurance costs.

• Trickledown effect: When reinsurance prices rise, or availability tightens, primary insurers pass these costs on to policyholders through higher premiums and adjusted terms.

Global and regional events

Events beyond your control also influence insurance costs. Some examples include:

• Natural disasters: The increasing frequency and severity of catastrophic weather events, such as hurricanes, wildfires, and earthquakes, drive up claims and, consequently, premiums.
• Economic pressures: Inflation and rising material costs make rebuilding more expensive, impacting insurance-to-value (ITV) calculations and driving rate adjustments.

Navigating rising commercial property insurance costs

A combination of individual risk factors and broader market forces influences the cost of commercial property insurance. Proactive risk management, accurate valuations, and staying informed about industry trends can help you navigate these rising costs effectively.

Understanding factors, like CAT risks, loss history, and insurable value, can help you better manage expenses while helping ensure adequate protection for your commercial real estate portfolio.