GUEST COLUMN: Four Tactics to Overcome a Tough Reinsurance Market

Challenges in the reinsurance sector have led to insurers raising premiums and restricting capacity for commercial real estate. Thankfully, there are strategies available for real estate owners and operators in the Tucson area to manage these challenges.

By Jim Clements, CIC

In a world defined by constant transformation, real estate owners and operators in Tucson must adapt to protect their investments due to changes in the reinsurance market.

Reinsurance, often referred to as “insurance for insurers,” is often misunderstood by business and real estate owners and operators, but is an essential component for determining the cost and availability of property coverage.

Recent reports indicate that reinsurance costs have surged 30.1%, and capacity has fallen. This has made it increasingly difficult for real estate owners to find affordable coverage.

The reinsurance market’s turbulence is attributed to a surge in catastrophic losses resulting from global natural disasters. The year 2022, in particular, was one of the costliest years on record, with a staggering $275 billion in losses attributed to such calamities.

Insurance carriers purchase reinsurance to protect themselves from catastrophic losses. But when reinsurers increase costs or reduce capacity, insurance companies must assume more risk. As a result, insurance companies increase insurance premiums, increase deductibles to limit their exposure to risk, and/or lower the amount they are willing to insure.

The outcome is clear: Real estate enterprises in Tucson and beyond are now paying more for less coverage, with no significant improvement anticipated in the near future. This challenge is in addition to other issues currently faced by Tucson commercial stakeholders, including a lack of supply, declining profits due to inflation, and outdated industrial spaces.

Four strategies for real estate owners and operators 

Real estate owners and operators in Tucson can’t change the reinsurance market, but they can take steps to minimize the fallout. Here are four ways to help navigate the turbulent reinsurance market.

  1. Leverage expertise and resources. Creative solutions to save on insurance costs are available, but real estate owners and operators must allocate resources to leverage them. Partnering with a trusted advisor can help you determine how to proceed and reveal different options that can help find the best coverage and the best price. Strategies include CAT modeling, placing coverage with multiple carriers, splitting off less desirable locations, and reviewing property leases for hidden liabilities in property leases that may unveil enhanced coverage opportunities at more affordable prices.
  1. Obtain accurate property valuations for reconstruction costs. Accurate valuations that account for the rising costs of rebuilding have become a major industry concern. As a result, carriers are shying away from policies with valuations that are too low or inaccurate, or they may be automatically increasing premiums to cover higher replacement costs where they deem values to be underinsured. In certain situations, carriers may add a co-insurance penalty to the policy or claims if the property owner was underinsured. To address this, provide a third-party reconstruction appraisal with a property insurance application or renewal. This could help ease carrier worries about reconstruction costs and avoid extra costs and penalties.
  1. Maintain top-notch properties. Prioritizing robust risk management strategies, particularly in flood- and fire-prone areas, can expand results in increased insurance options and better pricing. This approach involves keeping properties in optimal condition and enhancing security measures to prevent theft and damage.
  1. Think about parametric insurance. Parametric insurance covers the risk of property damage caused by specific perils, like wildfires. In addition, a parametric policy will pay out even if the property does not incur damage. Real estate owners and operators can immediately cover losses such as business interruption costs because the payout is expedited. These payouts are triggered regardless of physical damage, empowering real estate stakeholders to manage losses promptly, including any disruption to business operations.

In an age where resilience is paramount, real estate owners and operators in Tucson must adopt proactive strategies to protect their commercial real estate investments from the changes in the reinsurance market. By implementing a multifaceted approach that combines diligent property management, accurate valuations, innovative insurance models and expert guidance, stakeholders can not only survive but thrive and discover opportunities for growth.

About the author

Jim Clements, CIC, Senior VP of Hub International and has more than two decades of experience working with clients and their property and casualty insurance needs across a variety of industries. Jim serves his community as a lifetime member of both the Fiesta Bowl and the Phoenix 20/30 Club.

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