Commercial real estate premiums and losses may change quite dramatically because of the coronavirus. While actuaries who help set insurance rates build models that assume some unusual levels of risk, actuaries focus on weather and other expected losses such as property damage or bodily injuries. They do not build pandemic assumptions into their models, at least when it comes to property and casualty insurance. Considering the recent pandemic, therefore, actuaries will scramble to update actuarial models.
The COVID-19 pandemic will continue to contribute to a hardening insurance market. Let’s look at how the coronavirus will affect commercial real estate (CRE) losses and insurance rates.
Actuarial Models Are Flying Out the Window
In general, in addition to rate increases, carriers will offer lower limits of coverage and may insist on higher deductibles or retentions. In a recent Insurance Thought Leadership article, insurance actuaries admit: We have it “all wrong.”
Actuarial assumptions include some of the following.
- The frequency of losses
- The cost and timing of payouts for those losses
- How losses correlate between insurance contracts. For example, if your insurer writes different coverages such as commercial auto and commercial property, actuaries will examine how losses in one line of coverage may affect profitability in other lines of coverage.
What you should know today about actuarial science is that no one predicted this type of virus when calculating today’s rate sufficiency. Clearly, actuaries will work quickly with insurance organizations to determine how the current pandemic may affect profitability and rates going forward. In a recent webinar, Rich Gibson, a Senior Casualty Fellow at the American Academy of Actuaries, stated, “There are far more unknowns than knowns. Under the aegis of COVID, we have increased uncertainty. As these issues emerge and change, we need to be able to ask more questions and adapt accordingly.”
Gibson predicts decreases in asset values, premium declines and increased claim and legal expenses “for many lines of business.” However, the harder market started pre-COVID and the pandemic is simply worsening rate outlooks for the CRE insurance consumer. According to a recent article in Risk & Insurance, “Nearly all commercial lines can expect to see rate increases and reduction in capacity through 2020.” “Capacity” is the willingness and financial ability of insurers to accept and underwrite more risk.
Which Commercial Real Estate Premiums and Losses Will COVID-19 Impact?
The coronavirus will hurt some lines of coverage, while other lines may experience fewer losses. Here are some examples.
General liability – Premises claims should reduce due to the shuttering of businesses. However, in habitational and real estate multifamily risks, experts predict more claims because children aren’t attending school. Owners of apartments and condominiums may see an uptick in liability claims. Additionally, third-party claims may arise from allegations of not disinfecting adequately or not keeping premises in good condition. Be sure your property management teams don’t isolate themselves to the building’s detriment and that they quickly address tenancy issues.
Commercial property – While experts predict fewer fires due to decreased occupancy, water damage or fire damage may go unnoticed for longer, creating larger losses when they do occur. Property managers should inspect and make certain sprinkler systems are operational and plumbing inspections are up to date. Habitational and residential risks can create more fires in apartments, co-ops and condominiums since more people are staying home and cooking. Supplying fire extinguishers to your occupants may help reduce fire severity should it occur.
Commercial auto – Commercial auto has experienced lower claims frequency because of the coronavirus. Commercial auto claims have decreased significantly due to supply chain disruption and reduced employment. Don’t expect a refund any time soon, however. While some personal lines carriers have issued auto refunds, few commercial insurers have followed suit. They may want to retain any profits on commercial auto to smooth losses on other coverage lines.
Workers compensation – Workers compensation rates have dropped this year. However, coronavirus claims from essential workers and first responders may offset reductions expected from fewer injuries as workers telecommute or lose their jobs. If your payroll drops significantly, be sure to talk with your insurance broker to adjust your premiums and take any savings before the policy year ends.
Employment practices liability – Staff reductions, potential Family Medical Leave Act issues and layoff decisions can be a landmine for employment practices risks. Don’t go it alone. If you don’t have a human resources professional on staff, consider hiring one locally. Your local Society of Human Resources chapter can help. If you use a payroll service, many offer human resources helplines. One shaky employment decision can draw regulatory attention and result in an expensive lawsuit.
Cyber – Possibly because so many workers moved to home offices, hackers saw an opportunity to exploit more naïve computer users. Phishing scams that try to trick users into divulging sensitive information such as passwords have risen sharply post-virus. If you’re simply relying on your businessowners policy for cyber coverage, you may find your coverage limited after a cyberattack. Read more about the constraints of cyber coverage here.
Directors & Officers – Carriers expect losses due to the financial crisis post-COVID-19. It is imperative that your directors, officers and senior managers document their decisions. Avoid overly optimistic statements about profitability. If you don’t know, it’s better to say that the current environment includes many challenges than to make more optimistic statements that later do not materialize.
Finally, a harder insurance market has been on the horizon for commercial real estate premiums since 2019. For the CRE risk manager or investor, schedule time with your insurance broker to discuss whether you can decrease certain coverages to lower premiums. Considering today’s emerging risks, you may need higher coverage limits. Our recent article addresses some of these considerations on commercial real estate premiums and losses.
If we can help you, we’re always happy to talk. Contact us here.