Strategies for meeting property insurance challenges

The property insurance market is facing challenges on many fronts, from weather-related incidents and increased natural disasters to supply chain issues and rising construction and insurance costs.

The following is a look at the current conditions, as well as strategies to address these challenges.

Weather-related incidents
In addition to the growing frequency and severity of major storms such as hurricanes and blizzards, Massachusetts is facing increased weather-related issues such as flooding, hail, wildfires and even tornadoes. MIIA’s property insurance program has seen recent reported losses specifically tied to significant increases in convective storms that result in high winds, lightning strikes, power surges, and sudden and torrential rainfalls.

Installing monitors to detect flooding — be it from a storm or a broken pipe — can help to minimize damage from floods. Electric circuit breakers can prevent damage to vital equipment that can be caused by power surges related to lightning strikes. And back-up generators can alleviate loss-of-power problems such as mold forming from a lack of air conditioning or pipes that burst due to freezing.

All these measures can save a municipality thousands of dollars in equipment and facility replacement costs, and can help to limit annual premium increases.

Aging infrastructure
As buildings age, they become vulnerable to loss as infrastructure, systems and materials deteriorate. Property reinsurers are acutely aware of this phenomenon, referred to as “attritional losses,” which is why they view building age and condition as critical underwriting factors. A favorable loss history for a certain building doesn’t guarantee a favorable rating.

MIIA has been collecting valuable Construction, Occupancy, Protection, and Exposure (COPE) data on member properties to provide a snapshot of risk exposure and help influence a more favorable rating. COPE data gives underwriters information on building conditions, including upgrades to infrastructure, which underscores the importance of following rigorous maintenance practices and timely capital improvements. Efforts in this area can have the greatest impact on helping to minimize risks and reduce losses.

Construction costs and supply chain issues
Rising construction costs are having a negative impact on the severity of losses. Building material prices have increased more than 20%, year-over-year, since the beginning of the pandemic.

In a September article in Construction Dive, Chris Bailey, senior vice president of integrated solutions at XL Construction, said that construction costs have outpaced inflation by about 1.5%. To combat inflation challenges, he recommends pre-ordering long-lead-time materials and being prepared to use alternate materials.

Delays in obtaining critical building materials further complicate the timely resolution of claims. Heavy-duty electrical equipment and switchgear procurement has been particularly challenging. Supply chain issues not only drive up costs, but also result in delays getting critical operations back up and running.

The Counselors of Real Estate list supply chain disruption among their Top 10 Issues Facing Real Estate in 2022-2023.

“In the real estate sector, everything from routine repairs and maintenance to property improvements to new construction are greatly impacted,” the article states. “Delays in deliverables, rising costs, shortage of labor, and lack of materials are influencing nearly all companies and their related real estate.”

Effective planning can save a municipality time and money. During the pandemic, many cities and towns understandably put capital planning on hold. But it is now recommended that municipalities update their capital plan so they can invest in buildings and equipment where and when needed, through a planned process, rather than in a crisis.

Reinsurance market
Against the backdrop of global weather events, sustained losses, and low investment rates, MIIA has seen a doubling of reinsurance costs over the past five years. At the same time, MIIA has had to retain a higher percentage of losses before reinsurance coverages are triggered.

Within the marketplace, reinsurance capacity has shrunk, and premiums have risen sharply. On Sept. 12, Reuters reported that, “Rates could rise in the ‘mid-single digit’ percent range, S&P analysts said last week, while a Moody’s customer survey showed expectations for double-digit rate rises in U.S. property reinsurance.”

Property loss mitigation action planning
Implementing sustained best practices in facility management maintenance, employing preventive and predictive maintenance, and updating capital improvement plans can all help to ease the confluence of challenges.

Municipal leaders are encouraged to work with their insurance risk manager to identify risk areas and develop property loss mitigation action plans. By making this a priority, they can help to prevent property losses and save valuable time and money.

Written by Stephen Batchelder, MIIA vice president for claims operations and risk management