Higher commercial insurance deductibles are today’s new normal for commercial real estate (CRE) property owners and managers. Increasing deductibles is just one method today’s insurers are implementing to address historic property losses in the past years. Weather patterns along with the accompanying climate risks and flat investment income are factors affecting today’s hardening property insurance market.

Additionally, higher construction costs and the increasing use of frame construction have underwriters reevaluating renewal and new commercial real estate risks more closely. Many insurers are increasing deductibles for named storms or hurricanes, especially for businesses with storm-related histories. According to one insurance expert, multi-family properties today face substantial insurance challenges.

Several carriers exited the marketplace for multi-family housing, leaving the remaining carriers in a stronger position to impose higher deductibles even on smaller real estate portfolios.

What is the best way for a commercial property managers to respond?

Commercial Insurance Deductibles Versus Self-Insured Retentions

Commercial real estate owners often manage insurance premiums either by using commercial property deductibles or by taking a self-insured retention (SIR). Both these approaches to managing premium increases help smooth the insurance purchase process. However, property deductibles and SIRs differ.

A deductible is a fixed amount that your insurer will deduct after handling your claim from its inception. With SIRs, most insureds handle their own losses in-house or with the help of a third-party claims administrator. The insurer does not become involved if the loss does not exceed the SIR. Retentions can range from $10,000 to millions. This brief article includes more information on the difference between a deductible and a retention.

If the property insurance market continues to harden as predicted, commercial property managers may begin taking retentions to handle their smaller losses in-house. A CRE owner usually considers a retention only after the organization has hired an in-house risk manager to handle all its risk financing efforts.

Higher Commercial Insurance Deductibles – Why You May Not Have a Choice

In a January 2020 article in Business Insurance (BI), “across the board rate increases in property” insurance create a “challenging marketplace for property.” The article reports double-digit rate increases across commercial real estate portfolios. The article then outlines other issues facing CRE investors and property managers. These issues include more stringent policy terms, increased use of lower sub-limit amounts and higher deductibles. In some cases, the article reports, carriers are cutting back the limits they offer by 20% to 50%.

Many CRE owners have no choice but to take higher deductibles because that’s the option their carriers offer. CRE risk managers and owners across the nation are increasingly shopping their commercial real estate portfolio to control their insurance spend.

Catastrophe-prone areas are heavily impacted, according to BI. Where just a few years ago underwriting was less disciplined, today’s insurers insist on raising premiums to a profitable level given past weather- and fire-related losses. Part of that strategy is insisting insureds take on more risk. “Carriers are going to force the higher deductibles onto them as a risk-sharing mechanism,” BI reports.

Do Deductible Increases Really Impact Premiums?

In the past, taking a higher deductible would decrease premiums on accounts with an unblemished loss history. In today’s CRE market, however, higher deductibles may not impact your premium much. Instead, insurers impose higher deductibles to reduce their loss payouts. Your rates may remain stable with a higher deductible or the insurer may impose a higher deductible while still raising rates.

Another Option – Shared Limit Programs

Today’s insurance brokers experienced in commercial real estate assist their CRE customers in managing their portfolio’s insurance more effectively. One method to help keep rates low is a shared limit program. Unrelated property owners with similar real estate portfolios may band together to aggregate their properties under a shared per occurrence limit. Springing into existence after Hurricane Katrina significantly impacted the commercial real estate property insurance market, this strategy for managing portfolio risk is becoming more common.

Even with the shared per occurrence limit, insured’s can protect themselves with a dedicated limits endorsement. In the event that the per occurrence limit is exhausted before the insured is fully indemnified, the dedicated limits endorsement provides excess coverage up to the insured’s full insurable value.

The shared per occurrence limit controls the carrier’s exposure to catastrophic events which means more affordable rates. Meanwhile the dedicated limits endorsement provides the insured with peace of mind that their asset is fully covered. 

In this time of rising premiums and less favorable insurance terms, it makes sense for commercial real estate portfolio managers to reconsider their deductible levels and other insurance options.

If you face higher deductibles and less favorable policy terms and conditions, we can help. For more information on insuring your real estate portfolio, contact us here.