In the dynamic realm of real estate, market fluctuations continually redefine the strategies of property owners, developers and managers. The complex interplay between insurers and reinsurers, although often behind the scenes, significantly impacts the cost and availability of insurance for commercial properties. With the current reinsurance market facing rising costs and limited capacity, real estate stakeholders must adopt innovative and proactive approaches to navigate these challenges effectively.

Catastrophic losses fuel reinsurance costs surge

Reinsurance, often coined “insurance for insurers,” plays a crucial role in risk management, particularly within the commercial real estate sector. The recent shifts in the reinsurance landscape have underscored its growing importance, with reinsurance pricing predicted to peak in 2024. These sudden changes have complicated the quest for affordable and comprehensive insurance coverage, necessitating a reassessment of strategies for real estate owners and operators to protect their investments.

Senior vice president, commercial risk at Hub International.

The primary driver of this upheaval in the reinsurance market has been the surge in catastrophic losses due to global natural disasters. Notably, 2023 stands out as one of the costliest years on record, with 28 weather and climate disasters that incurred an estimated $92.9 billion in damages, surpassing the previous record of 22 in 2020. While most of us typically jump to the idea of Coastal Hurricanes and Western U.S. Wildfires being the common natural disasters occurring in the United States, the Central and Midwest Regions have recently seen an increase in events from convective storms, straight line winds, and hail damage resulting in insured losses.

The ripple effect of reinsurance

To safeguard against substantial losses, insurance carriers depend on reinsurance. However, as reinsurers adjust their strategies to address rising risks, the repercussions are felt across the industry. When reinsurers hike costs or reduce capacity, insurance companies are forced to absorb more risk. This inevitably leads to higher insurance premiums, stricter limitations on risk exposure with increased deductibles, or a reduction in the maximum coverage offered.

Real estate investors are typically drawn to the Midwest due to its diversified economy, consistent economic growth and low unemployment rates, which collectively foster a stable real estate environment. The region’s lower cost of living and business operations compared to other areas results in higher rental yields, attracting those looking to expand their investment portfolios.

As the reinsurance market exerts its influence, real estate owners and operators in Michigan face the challenge of paying more for potentially reduced coverage. Property owners must proactively seek solutions to mitigate these impacts and safeguard their investments.

Here are four options to navigate the uncertain reinsurance market:

1. Ensure accurate property valuations. Accurately assessing replacement costs in the event of catastrophic events is critical to avoid inaccurate replacement costs on property policies, as undervalued properties are increasingly avoided by insurers. Property owners and developers should include third-party reconstruction appraisals during insurance applications or renewals to provide insurers with a comprehensive view of reconstruction costs to help avoid potential penalties and added costs.
2. Explore parametric insurance. Unlike traditional insurance models that rely on actual property damage, parametric insurance covers risks from specific perils, such as storms, and triggers payouts regardless of physical damage. This approach allows for swift loss management and mitigates disruptions to business operations, offering real estate stakeholders in Michigan a faster recovery mechanism.
3. Strive for excellence in property management. Implementing robust risk management strategies, particularly in areas prone to floods and fires, can expand insurance options and potentially reduce costs. Maintaining properties so they are in optimal condition and enhancing security measures to prevent theft and damage are essential components of this strategy.
4. Leverage expertise and resources. Navigating the complex reinsurance landscape requires expert guidance. Collaborating with trusted advisors can reveal innovative solutions to reduce insurance costs. Utilizing strategies such as catastrophe (CAT) modeling, selective coverage placements across multiple carriers and thorough reviews of property leases for hidden liabilities can uncover opportunities for enhanced coverage at optimal prices.

Reassurance with reinsurance

In a time where resilience is crucial, real estate owners and operators must adopt proactive strategies to safeguard their investments from the volatile reinsurance market. By integrating meticulous property management, precise valuations, innovative insurance models and expert guidance, stakeholders can not only withstand challenges but also discover growth opportunities. As the reinsurance landscape evolves, those who stay agile and forward-thinking are well-positioned to thrive despite the obstacles.

Austin Smith is a Senior Vice President in Commercial Risk at international insurance brokerage Hub International Michigan.