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Inflation increases problems for property policyholders



Buyers of commercial property insurance should prepare well in advance of renewals and ensure that their valuations are correct to better manage the impact of inflation on the costs of their property insurance program.

While interest rates have slowed slowly after several years of significant increases, policyholders are facing premium increases of up to 20% as inflation pushes up values ​​and potential loss costs, say industry experts.

Increased demand for building materials and other items during the pandemic led to disruptions in the supply chain and sky-high prices that have not yet fallen. The costs of rebuilding and repairing properties are inflated, while the shortage of labor has increased the strain, they say.

The sharp inflation trend has caused an increase in values, which increases premium costs, says Gary Marchitello, chairman of Willis Towers Watson PLC̵

7;s North American real estate business in New York.

“Even if you get a flat renewal, your premium can go up by 20% because your value base has risen by 20% due to inflation,” he said.

From the customer’s perspective, the increase in inflation comes after several years of higher pricing, Marchitello said.

“They were hit by three to four years of interest rate hikes and now they are hit by a premium increase of 10-15-20% due to inflation. That is not a happy scenario,” he says.

Risk managers understand that inflation increases premiums and that higher costs can be expected, says Manny Padilla, New York-based vice president, risk management and insurance, at MacAndrews & Forbes Inc. and board member of Risk and Insurance Management Society Inc.

“It’s just a matter of what that number is.… Some operators have done a good job of creating indices and projections in the future so we can use it as a guide. Others just basically hit a coin and say at least 15% , he said.

Insurance companies are focused on managing inflation from a portfolio perspective and working with policyholders to reduce their total risk cost, says David Blevins, vice president, property manager for commercial insurance, at Chubb Ltd. at Whitehouse Station, New Jersey.

“As inflation increases, the costs – whether there are limits, whether there is a potential shortage of labor, losses from business interruptions – they are all potentially at an increasing severity,” said Mr. Blevins.

Insurance companies are concerned about interest rate and reserve adequacy, so there is a renewed focus on reported values, says Martha Bane, Glendale, California-based CEO of North America Property Practice at Arthur J. Gallagher & Co.

“There has been some complacency in accepting rollover values ​​year after year, but they no longer accept these values,” she said.

In addition, insurers also dive into the details of how values ​​are determined, and often ask for third-party validation of the values, Bane said.

“When they are not comfortable with these valuations, they tend to be more conservative with their issue guarantees. They offer more onerous terms and this is often reflected in their pricing,” she says.

Michael Williams, Whitehouse Station, New Jersey-based vice president, leader in manufacturing, commercial insurance, at Chubb, said the insurance company has not decided to cut coverage due to inflation.

“We are just looking for, frankly, an adequate valuation and after the insured updates the time frame accordingly,” Williams said.

Valuation is not just about compensation costs, said Blevins. “It’s absolutely about how insured people manage through this and how their insurance program should react,” he said.

Risk managers should review their coverage conditions and ensure that their policy limits and sub-limits are sufficient to cover a loss in the inflation-driven environment, experts say.

Risk managers understand that they have to pay a reasonable premium, but the challenge is to quantify how much they need in limits so that in the event of a loss they do not have more expenses that are uninsured than they are insured, Padilla said.

“A $ 10 million lower limit on inflation will actually be 80% if it’s a 20% inflation factor, so I have to raise that lower limit to make sure I take inflation into account on my side of the equation,” he said.

Loss prevention is crucial, said Mr. Blevins. The more a policyholder can manage their facilities to address risk technology and the potential for loss, and prevent front-end losses, the better they can manage their total risk cost, he said.

Neither insurers nor policyholders want surprises, Bane said. Customers should prepare well in advance of renewals and verify their values ​​to ensure they budget accordingly for increased premiums, she said.

“Being able to deliver the message to insurers that you take values ​​seriously, that you are focused on a data-rich statement of value … is really different,” she said.

If a company does not want to increase its insured values, it may face limits on how much it could recover in the event of a loss, Marchitello said.

“It’s a big compromise – to give up coverage to save premiums,” he said.


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