The Effect of Rising Fees on Commercial Property Insurance

From supplier shortages to COVID-related shutdowns to labor shortages, 2022 brought high US inflation rates of the last 40 years. Inflation affects everything from the price of a (old) “dollar pizza” to the cost of used cars to stainless steel construction equipment, making it especially relevant to commercial insurance policies with construction and business equipment.

How has inflation affected construction costs?

Commercial buildings are usually insured for a rather expensive basis, which is the cost of replacing the building with materials of the same quality and quality without deduction for depreciation.

According to National Building Cost Trends, the year-over-year changes in material costs between January 2021 and January 2022 were remarkable:

  • Prices + 15.6%
  • Plywood + 47.0%
  • Commercial metal + 21.5%
  • Commercial Concrete + 14.2%
  • Structural Steel + 34.2%

Six months until 2022, the rate hike has not yet slowed down. In fact, a Corporate Responsibility Report produced a building price index and construction cost increases of more than 14 percent by the end of the fiscal year, and labor and material costs are lagging behind.

Fortunately, experts also predict a gradual decline in prices over the next two years. Equipment prices, for example, will be the first part of the cooling construction model, and are expected to return to normal prices by mid-2023. The current period is expected to stabilize by the end of 2024.

What does inflation have to do with insurance?

One of the main purposes of business insurance is to transfer the financial loss to the insurance company, freeing up some of the recovery costs for your business.

While you can’t control inflation, you can manage your financial security by reviewing your current limit and making sure the limit is sufficient to replace the home in the event of a catastrophic loss.

Being uninsured can lead to large unexpected losses. Some commercial insurance includes coinsurance clauses that require the homeowner’s limit to be a minimum (usually 80, 90 or 100 percent) of the total replacement cost. If current rates of inflation are not taken into account, the coinsurance penalty can also result in unexpected costs.

Remember: Central Insurance ceases to offer coinsurance for many of our businesses.

How to Safeguard Your Business Assets

An independent insurance agent and insurance company will have analytical tools to determine the cost of replacing your home. Since property prices are used to build prices out of 100, you may see an increase in prices as inflation rates increase.

Several mitigation measures to address this include higher deductiblesimplementation fire protection (ie sprinkler systemcentral alarms) to be able to repay debts, and self insurance for small houses.

Meeting with an insurance agent it’s also a good opportunity to make sure you have adequate coverage for any building codes or legal requirements.

Business profits should be reassessed in light of rising prices. This need keeps money flowing, keeps valuable employees and keeps customers. Inflation can affect sales, payments and turnaround time to restock your inventory. Additionally, there may be a coinsurance clause that applies. Your independent consultant can help you analyze these indicators to create the right business limits.

Don’t forget: Central Insurance excludes Business Income coinsurance from most of our business rates.

Commercial Property Insurance and Central

A commercial property insurance helps you manage multiple exposures to financial loss.

Central access gives you the peace of mind you need to have your property covered, even during times of inflation.

Additionally, discounts are available for new homes, quality loss, and above-average maintenance practices.

Don’t let inflation reduce your security. Be proactive and organize a discussion and your agent to review your content and ensure that you are adequately protected.

Contributing Writer, John Carroll
John Carroll is a Commercial Staff Underwriter at Central’s Southeast Regional Office. His work includes writing commercial and educational articles. They have over 30 years as commercial lines and 20 of them are Central. John is a graduate of Georgia State University and earned the Chartered Property Casualty Underwriter (CPCU) designation.

The above information is general in nature and your information and input may differ from the examples provided. Please read your entire policy to find out what is available.

This article was originally published in March 2022, and has been updated correctly.