Despite facing challenges from climate risk and inflation, the U.S. commercial property insurance sector is showing signs of improvement, according to a new brief by the Insurance Information Institute (Triple-I), affiliated with The Institutes. The report highlights stable growth in rates and suggests that strong underwriting performance and improved investment returns could enhance operating profitability in the medium to long term.
The 2024 S&P Global Market Intelligence U.S. Property and Casualty Industry Performance Rankings report indicates that commercial lines have benefited from underwriting margins that outperform the long-term average, despite slowing year-over-year growth in direct premiums written.
A recent market report from AON notes a shift in commercial property insurance rates for the first time since 2017. Rates moved from a +34% increase in Q1 2024 to a -0.94% decrease in Q2 2024. "Increasing climate and catastrophe risk, particularly secondary perils, drive losses," said Dale Porfilio, chief insurance officer at Triple-I.
Munich Re's report estimates insured losses from tropical cyclones in the U.S. this year at $51 billion, with two hurricanes accounting for 80% of this amount: Milton ($25 billion) and Helene ($16 billion). However, total insured losses for 2024 are slightly lower than those during the previous three hurricane seasons.
Reinsurance appetite remains aligned with capacity demands, but future competitiveness may depend on how the reinsurance market adapts to frequent catastrophic events and losses experienced in late 2024.
Undervaluation of commercial properties poses challenges for adequate coverage and risk mitigation. A Kroll study found that an estimated 90% of buildings were underinsured, with many valued between 2020 and 2021 being underinsured by at least 25%. With rents declining significantly for commercial buildings and over $1 trillion in loans maturing in 2025, investors may need to recapitalize loans based on lower values.
"This vulnerability could ignite a shift in property insurance dynamics when the market sees an increase in claims not adequately covered by existing policies," said Porfilio. He added that changes in underwriting practices could mitigate economic volatility as businesses demand more comprehensive coverage options due to increasing risks.
Porfilio concluded by emphasizing that "future outcomes will ultimately hinge upon relationships between insurer and policyholders."