Whether you are a homeowner or a large corporation you are most likely feeling the pain of property insurance premium increases. In fact, the average premium increase on property insurance is expected to be 10%-15% for non-catastrophic exposed properties and 15%-25% for catastrophic exposed properties according to Willis Towers Watson’s 2023 market predictions report.
As an insurance broker, our clients often ask us why – “Why are my property premiums going up by 15% when I have never had a loss?” My goal in this blog post is to answer this question.
There are two primary reasons that property premiums are increasing.
1.Inflation – As expected the cost of materials and labor has significantly increased. This means that the cost to replace a building has increased. Carriers need to offer higher limits in order to fully insure a building. Inflation, which is causing the need for higher limits, has caused an increase in the demand for coverage. However, on most accounts premiums are increasing at a greater rate than the amount of additional coverage. Building limits might go up 8% but premiums might increase by 12%, so there has to be another factor that is causing the premiums go up. That other factor is reinsurance.
- Reinsurance Market – Insurance companies purchase reinsurance. Reinsurance is insurance for insurance companies. It is an insurance company’s way of hedging (It is not much different than hedging a bet or hedging an investment). The 2023 Property reinsurance market is expected to be the most challenging market in the past 30 years. In addition to an increase of the cost of materials and labor, this is also being driven by an increase in the number and the cost of catastrophic losses (natural disasters) in 2022. These losses have caused a significant squeeze on the reinsurance capital available.
When you combine the increased demand for reinsurance caused by inflation and decrease in supply of reinsurance caused by natural catastrophes it results in reinsurance rates going up significantly. As you would expect, when reinsurance rates increase the insurers then pass that cost onto insured’s.
Insurance is a marketplace where insureds are not priced in a vacuum. So even if you have not had a loss or are not located in a natural disaster exposed area you will be impacted by the market dynamics mentioned above.
There are many ways insured’s can combat these increases; insert the role of the broker. This may involve taking more calculated risk in certain areas. Insured’s should be very thoughtful and deliberate about how they purchase insurance in order to navigate the difficult market.