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Digital EditionIs Your Commercial Property Ready for the Next Major Disaster? The 2025 Risk Forecast
Commercial property risks have increased exponentially in severity over the last 12 months.
Extreme weather events caused by climate change have become more frequent, severe and unpredictable in their nature, often occurring in places where they hadn’t before, and on an unprecedented scale, resulting in more and larger claims.
Added to that, steep building material replacement and labor costs are having a knock-on effect on rates in an already highly volatile market.
Yet, there remains optimism about insurance availability, with property rates declining 0.94% in the second quarter of 2024 — the first quarterly decrease since 2017 — according to the Insurance Information Institute (Triple-I).
The Triple-I report concluded that strong underwriting performance and improved investment terms, which can bolster operating profitability, could be key to insurers’ success in the medium to longer-term. Still, losses are formidable.
Katie McGrath, U.S. CEO, Swiss Re, said the latest research by the Swiss Re Institute found hurricanes, severe thunderstorms and floods drove insured losses above $100 billion for the fifth consecutive year. Worse still, she said, as temperatures continue to climb and extreme weather events become more intense, estimated insured losses could double within the next 10 years.
“With more people and infrastructure concentrated in the more exposed locations, loss potential is only increasing,” McGrath said. “The large-scale losses from Hurricane Ian in 2022 as well as the losses from Hurricane Helene and Milton [in 2024] are a clear demonstration of these factors at play.”
Reform Push
Eric Benedict, senior associate, Atlanta, at Clyde & Co., said this year, a renewed push can be expected for statutory reforms in the commercial property insurance market in hurricane-prone states that were severely impacted by the 2024 Atlantic hurricane season.
He said both Florida and Louisiana have recently enacted such reforms, which are anticipated to shift the legal landscape from being more favorable to insureds towards a more insurer-friendly framework, thus making it harder for plaintiffs to recover their attorney fees.
“These changes may decrease a policyholder’s incentive to bring a suit and lead to a decrease in the number of suits brought against insurers, with policyholder firms focusing their efforts on larger cases and those with a higher likelihood of recovery,” said Benedict.
“These changes have led to criticism from policyholders and their policyholder’s bar alike, so 2025 may bring renewed efforts to reverse these reforms in states that have enacted them and prevent enactment in states where reform may be on the horizon.”
Current global geopolitical tension, not to mention cyberattacks, have had an impact on the supply chain and the availability and costs of building materials. Insurers are also keeping a close eye on what effect the new U.S. federal government administration will have on the commercial property market.
“For businesses operating globally, these changes could lead to increased costs and volatility,” said Iain Roberts, head of property broking, financial institutions, CRB, WTW. “Many companies may consider reshoring or nearshoring production to mitigate risks.
“It’s critical for businesses to revamp their continuity and supply chain management plans. The focus should be on building resilience and flexibility into operations, diversifying suppliers and markets to reduce dependencies, and enhancing risk assessment and scenario planning capabilities.”
Softening Markets
Despite all these issues, Nicholas Garside, chief underwriting officer for commercial property at Liberty Mutual, said the market is softening and terms have been broadened.
With that, he said it’s important to maintain pricing adequacy: “The market has started to soften in the latter half of 2024, and we expect that to continue into 2025,” Garside said.
“We have been working hard to ensure rate adequacy and adopting a steady approach to managing through the market cycle.”
Michael Rouse, U.S. property practice leader, Marsh, said that there had also been a decrease in rates for bigger, more complex insurance programs with large catastrophe exposure provided by different panels in multiple layers due to increased competition.
On the flipside, he said the single carrier business hadn’t experienced the same decreases.
“The shared and layered business has certainly become far more competitive of late,” Rouse said. “Some of that has been driven by pricing stabilization within those programs.” Capacity also returned in 2024 as carriers chased market share, thus giving buyers far greater options, yet those with heavy catastrophe exposure still found it hard to secure.
Garside said insurers needed to look at their portfolio as a whole and identify where they have aggregate concerns in terms of risk relative to market share and adjust it to ensure that their book is balanced.
In terms of solutions, McGrath said that in the cases where traditional indemnity-based insurance doesn’t provide the breadth of financial protection required by large corporates and governments, parametric insurance can be used to compliment it, with a simple trigger and payout mechanisms speeding up the claims payment process.
She added that multinational companies also need to work with an international program partner with natural catastrophe expertise, knowledgeable risk engineers and reputable underwriters to secure the best possible program.
“When it comes to demand for solutions, we see more risk managers looking towards alternative risk transfer solutions — specifically, retention management structures,” McGrath said.
“Companies and public entities are being asked to take more risk in the form of increased deductibles or reduced available limits across multiple lines of business. Given the recent volatility in insurance costs, risk managers are looking for more stable capacity in the form of unique multiyear covers.” Michele Sansone, chief underwriting officer, property, AXA XL, said, “Insurers’ property risk engineering capabilities play a crucial role in helping property owners and commercial property insurers manage risks and minimize potential property damage.
“For instance, our property risk engineers conduct thorough evaluations of physical properties to identify vulnerabilities to various risks, such as fire, flooding, theft and natural disasters,” Sansone continued.
“Once risks are identified, our risk engineers work with our clients to tailor mitigation strategies — which may include structural modifications, enhanced security measures, installation of advanced fire suppression systems or sensor technology that can help detect water leaks or other conditions.
“These strategies not only help our clients reduce the likelihood of an incident occurring but can also minimize the severity of any damage that does occur,” she said. &
