The commercial insurance market has been hardening for several years, marking the end of decades of smooth sailing — stable premiums and expanded coverage. According to one report, besides a brief period after 9/11, the last truly sustained hard market happened in the 1980s.
Gradual shifts over many years that led insurers to reduce prices and increase capacity characterized this long soft market. However, rising losses and claims have led insurers to reverse course, increasing premiums, tightening terms, and reducing capacity across many lines.
Experts anticipate these newer complex market conditions will persist throughout 2024 before they ease. Currently, though, commercial policyholders across multiple sectors face a much more challenging renewal process compared to the favorable market trends they’ve enjoyed over more than three decades.
Keep reading for a breakdown of some key trends.
National Trends
Insurance premiums are rising due to several factors.
Increased frequency and severity of natural disasters
Natural catastrophes have impacted the insurance market with zero signs of decreasing frequency or severity. NOAA data shows the average annual U.S. economic loss from billion-dollar disaster events has doubled from about $60 billion (1980s-2010s) to $120+ billion (2019-2023). The number of individual events soared from nine to 20 during these periods. In 2023 alone, the U.S. endured 28 separate billion-dollar catastrophic weather events, including hurricanes, storms, floods, wildfires, and a crippling drought in the West.
Cybersecurity threats
CRE properties are often prime targets for cyberattacks because of the sensitive data they store, like financial records and tenant information, and the interconnected nature of building systems — HVAC and security, for example. A successful attack can lead to data breaches, operational disruptions, and costly financial losses. The cost of cybercrime in the U.S. alone is expected to reach $8 trillion by 2024, with businesses in sectors — including real estate — being particularly vulnerable. A 2022 report from the FBI’s Internet Crime Complaint Center (IC3) found that real estate companies reported the third-highest cybercrime complaints among all industries.
CRE insurance policies may not adequately cover cyber risks, exposing property owners to significant financial losses. Businesses must carefully review their cyber insurance coverage and consider additional measures like cybersecurity training and incident response plans.
Business interruption
Natural disasters, pandemics, and other unforeseen events can cause significant business interruptions for CRE properties, resulting in lost rent, tenant turnover, and higher operational costs. The COVID-19 pandemic highlighted businesses’ vulnerabilities to disruptions, with many CRE properties experiencing closures and decreased occupancy. For example, one report stated that U.S. business interruption losses from natural disasters reached $73 billion in 2021. While business interruption insurance can help cover lost income and other expenses incurred during a covered event, coverage varies depending on the policy.
New Jersey-Specific Trends
New Jersey is facing its own commercial insurance-related challenges. Concerns about rising flood risks and potential changes to the National Flood Insurance Program (NFIP) drive demand for private flood insurance options in coastal states vulnerable to flooding. In fact, insurance companies are adopting their products and services to address various climate risks, including rising sea levels and extreme weather.
As the legal cannabis industry grows, insurance needs specific to these businesses are emerging, creating a new market for insurers. The state’s data breach notification law and other cybersecurity regulations impact coverage requirements and business risk management practices.
Other Economic and Social Pressures Squeezing Commercial Insurance
While natural disasters and extreme weather events capture the most headlines, other factors affect commercial insurance.
- Inflation, labor shortages, and material price hikes are pushing up the costs of rebuilding and repairing insured structures, putting a strain on insurers.
- High inflation squeezes investment income and increases administrative costs for insurers, further reducing profitability.
- Storm and wildfire losses have driven up reinsurance costs and reduced capacity, making it more expensive for insurers to manage risk.
- Inflation throws off property valuations, leading to insurance gaps of over 30% in some cases.
- Rising anti-corporate sentiment fuels costly lawsuits and settlements, impacting casualty insurers (and premiums) the most.
- Third-party litigation funding also allows plaintiffs to pursue larger settlements, increasing insurer litigation costs.
- Varying state laws on tort reform create uncertainty and the potential for higher premiums.
- Significant lawsuit awards are becoming more common, driven by anti-corporate sentiment and the perception that businesses can afford them.
- With higher claims and less capital available, some insurers are becoming more selective in underwriting and raising prices, particularly for high-risk industries.
Adapting to the Market
InsurTech companies are disrupting the industry with innovative solutions like data analytics, telematics, and AI-powered underwriting. More insurance companies are digitizing legacy processes and adopting digital tools and channels to interact with customers, provide services, collect data, and improve efficiency. Competition and challenges are also driving mergers and acquisitions among insurers, brokers, and underwriters looking to expand capabilities and scale.
Insurers are using more sophisticated data and predictive analytics to better assess, price, and manage risk — a strategy leading to more personalized pricing and coverage options. For example, new risks like cyber threats, drones, and shifts to the sharing economy are driving the development of innovative commercial insurance products to meet emerging needs. This proactive approach to mitigate risks up front via recommendations, technologies, and partnerships is aimed at prevention and resilience.
Recent reforms in New Jersey — including business interruption coverage requirements — are also pressuring insurers to continue adjusting their products, pricing, and practices as regulations and capital requirements evolve.
While many predict that the “hard market” will remain at least through the end of 2024, there are still opportunities to thrive. Strong economic conditions and new business formation remain drivers for success, especially for agents and brokers able to effectively support existing and new clients. AM Best predicts a stable outlook for U.S. commercial lines, citing consistently strong underwriting performance despite challenges like the pandemic and market volatility. Plus, insurers remain disciplined in risk selection and capacity deployment, as evidenced by healthy new business flow and growth in the excess and surplus lines market. So, while the current market remains challenging, opportunities exist for those who embrace agility, adaptation, and innovation.
Are you a commercial real estate investor or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United: an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
