The AIR CRE Town Hall, held on February 13, 2025, delved into the changing landscape of commercial property insurance, particularly in California. Expert speakers from Liberty Company Insurance Brokers – Gary Wells, Managing Partner and Codirector, Liberty Real Estate Practice Group, Jeffrey Shibata, Executive Vice President and Director of Insurance Operations, and Jeff Knowles CIC, CRIS, CCIP, WCIP, Senior Account Executive and Codirector, Liberty Real Estate Practice Group —provided valuable insights on the key factors driving premiums and strategies for property owners to navigate this complex market.
Below is a summary of the event topics, with the full video and presentation available for those seeking more details.
Six Key Drivers of Commercial Real Property Insurance Costs
- Catastrophic Losses
Natural catastrophes like hurricanes, floods, and wildfires are driving up premiums. In 2023, global insured losses reached $118 billion, with severe convective storms (SCS) accounting for 58% of these losses. - Reinsurance Costs and Capacity
The rising costs of reinsurance are passed on to customers, due to the increasing frequency of catastrophic weather events and broader financial market pressures. - Underinsurance
Many properties remain underinsured as rising construction costs have not been reflected in policy limits. Property owners must update asset valuations to ensure adequate coverage. - Property Replacement Costs
The cost to rebuild properties has increased, driven by rising material prices and supply chain challenges. These higher costs push premiums upward. - Skilled Labor Shortage
A shortage of skilled labor and rising wages are contributing to higher rebuilding and repair costs, which in turn raises insurance premiums. - Property Rate Need
Escalating loss trends driven by natural disasters and severe weather have outpaced the rate increases necessary to cover these losses, leading to higher premiums.
Global and National Catastrophic Events
Catastrophic Weather Events
Global losses from catastrophic weather events have been escalating, with $135 billion in estimated losses for 2024 alone. Natural catastrophic losses have exceeded $100 billion annually for the past five years.
Global Impact of Natural Disasters
U.S. properties are responsible for two-thirds of global insured losses. Total global economic losses, including both insured and non-insured losses, reached an estimated $320 billion in 2024.
Insurance Companies’ Reaction
Increased Risk Aversion
Insurers are adopting a more selective underwriting approach, preferring newer or well-upgraded properties and utilizing big data to assess risks such as wildfires and severe storms.
Market Shifts
More properties are being pushed into alternative markets, such as surplus lines carriers or government-backed insurers like the California Fair Plan, often with higher premiums and limited coverage.
Risk Transfer
Insurers are shifting more risk to policyholders through exclusions, higher deductibles, and mandatory loss control recommendations.
California-Specific Market Impacts
Insurance Market Crisis in California
Major insurers are pulling out of California, particularly due to the risks from wildfires. This is reducing the availability of coverage, particularly for older buildings and properties in high-risk areas.
Wildfire Impact
Ongoing wildfires in California have resulted in catastrophic losses, further destabilizing the market.
California Fair Plan
As private insurers withdraw, the California Fair Plan is seeing increased demand, but is under financial strain. Property owners in high-risk areas should be prepared for potential coverage gaps and rising premiums.
Liability and Umbrella Insurance Challenges
Liability Insurance
Liability claims are rising, driven by social inflation and an increase in large verdicts. Nuclear and thermonuclear verdicts (claims over $10 million and $100 million, respectively) have led to higher premiums.
New Exclusions in Liability Insurance
Insurers are adding exclusions to policies, such as those related to habitability, firearms, and animal-related injuries, pushing property owners to seek umbrella policies for broader coverage.
Umbrella Insurance Market
As claims become larger and more frequent, umbrella insurance has become more difficult to secure, with insurers implementing shared layers for higher coverage limits, which drives up premiums.
Best Practices for Building Owners and Property Managers
Documenting Physical Updates
Maintaining detailed records of property updates—such as renovations and repairs—helps ensure coverage reflects the property’s true value and reduces risks.
Regular Inspections
Property owners should schedule regular inspections to demonstrate to insurers that their properties are well-maintained.
Capital Expenditure Plans
Regular capital investments, especially in key systems like roofing, electrical, and plumbing, can help reduce insurance risks and costs.
Risk Management and Loss Control
Property owners should implement robust risk management programs and maintain emergency preparedness plans to mitigate risk and potentially reduce premiums.
Master Policies for Multiple Properties
Bundling properties under a master policy can simplify coverage and may result in savings, particularly for properties with similar risk profiles.
Strategies for Insurance Programs and Renewals
Align with Lender Requirements
Ensure insurance policies meet the lender’s requirements, including coverage limits and exclusions.
Develop a Tailored Strategy
Customize your insurance plan to meet the lender’s needs, using risk assessments and data analytics to make informed decisions.
Collaborative Approach
Open communication between property owners and lenders ensures that both parties can identify risks and develop effective mitigation strategies.
Optimize Coverage & Costs
Balancing comprehensive coverage with competitive premiums requires working closely with brokers to navigate exclusions and underwriting challenges.
Master Policies and Risk Pooling
Consider bundling properties under a master policy to reduce premiums and explore joining risk purchasing groups for better coverage options.
Looking Ahead
The Town Hall highlighted how commercial property insurance is being reshaped by global events, industry responses, and California-specific challenges. Property owners must adopt proactive strategies—like maintaining updated property records, regular inspections, and collaborating with insurance brokers—to navigate this volatile landscape. Staying informed and adjusting strategies accordingly is key to securing adequate coverage at competitive rates.
Town Hall Q&A
Q. What is forced placed insurance?
A. Force placed insurance is when a lender places insurance on a property and pulls the premiums out of escrow to pay the premium. This happens when a policy does not meet the insurance requirements in the loan docs.
Q. Where do the lenders get their insurance?
A. They have force placed programs that are on a monthly reporting form and are extremely expensive since little or no underwriting information is given to the insurance carrier and it only provides coverage for the lender. The rates on these policies can be 5 to 10 times higher than a traditional policy and are meant to be used for temporary deficiencies in coverage.
Q. When a roof is silicone is it considered maintained or updated from an insurance point of view?
A. It would depend on the age and condition of the roof and the coating. If a roof was recently coated it is a much better roof risk for wet penetration than an old roof, but not as good of a risk as a newly replaced roof.
Q. What is your advice on CA Non-Admitted Insurance?
A. Non-admitted carriers are fine and serve a great need in our industry. I highly suggest they are closely monitored by the broker for their financial size and strength. AM Best is the most commonly used insurance rating agency and I would stay away from financial sizes below a VII or VIII and only deal with an A-rated carrier. Non-admitted carriers do not participate in the California Insurance Guarantee Association and if they go under, there is no recourse.
Q. Is there an average increase for premiums of liability and property policies in 2025? (For budgeting purposes)
A. Tough to say, but I would budget for 10% on the low side and 25% on the high side. It really depends on the location, type of property, age of the building, building characteristics and tenant/occupancies.
Q. Risk Purchasing Groups sound great, but is it a real option in terms of costs today and readily accessible?
A. More are being formed on a regular basis and some are reasonably priced with great policy forms. If a property does not fit what we call the standard marketplace, they can be a much better alternative than the excess and surplus lines market. Be careful to read and understand the coverages and limits in a RPG or have a broker that clearly understands what the limits and coverages are.
Q. 2/3 of all catastrophic events payouts occurring in the US seems crazy. Do you have thoughts on what is driving the disproportionate amount of costs compared with the rest of the world?
A. We have a very unique weather system here in the US with deserts, mountains, and various climates. The United States is experiencing a high frequency of weather issues primarily due to climate change, which is causing more intense and frequent extreme weather events like heatwaves, heavy rainfall, wildfires, and stronger hurricanes, alongside factors like geography that contribute to diverse weather patterns across the country. This combination leads to a higher number of significant weather disruptions.
Q. If you’ve purchased a building and you don’t have a receipt from the previous owner for a repair or replacement, for example replacing a roof, what is the insurance company going to allow you to provide. For example, in a situation when the inspection shows that the building was fairly new?
A. A PCA report from the sale or an inspection from a qualified contractor can be a great way to get an insurance carrier comfortable with a building that may not have great record keeping from a prior owner. If given enough time, an insurance carrier may want to pre-inspect the building prior to providing a quotation. When in doubt, ask the carrier to come out and take a look.
Q. Are there any regulations on reinsurance companies? Is there a similar situation with the reinsurance companies paying assessments?
A. Yes, reinsurance carriers are regulated by state governments in the United States. The regulations are intended to protect consumers, ensure fair rates and contracts, and ensure the reinsurer’s financial stability. Every state has a department of insurance that governs the reinsurers in their state.
Q. CalFire has Defensible Space Rules, should it apply to all commercial properties?
A. Yes, it is always a good idea to create a defensible space to protect a commercial building and follow CalFire rules, however that does not always translate to making a building more insurable. Insurance carriers will look at the location and proximity to brush and Santa Ana wind patterns and use their risk scoring software to determine where they will and will not provide policies. Each carrier has a completely different appetite here in California and it changes constantly.