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Managing Rising Insurance Costs
By Dan Franklin, Director of Commercial Real Estate
River City Bank
In recent years, property owners have been facing dramatic increases in insurance premiums, reduced coverage availability, and more aggressive underwriting standards. In some cases, insurance costs have doubled or tripled within just a few renewal cycles. This has a direct and adverse impact on net operating income, which can affect property values, loan sizing, and ultimately investor returns.
Why Insurance Costs Are Rising:
- Large insurer losses over the past several years
- Increased exposure to wildfire and other natural disasters
- Inflation in labor and materials leading to higher replacement costs
- Specifically to California, reduced competition among insurers since many have deemed the market to have poor risk-adjusted returns
- Greater reinsurance costs being passed through to policyholders
What CRE Owners Can Do to Minimize Insurance Increases
While owners cannot control the broader insurance market, they can take proactive steps to improve insurability and reduce premium pressure, such as:
1. Invest in Risk Mitigation Improvements
Insurance carriers increasingly reward properties that demonstrate reduced physical risk. Examples of such improvements are:
- upgraded roofs,
- modern electrical systems,
- fire suppression systems,
- security enhancements,
- water intrusion prevention and leak detection systems,
- and defensible space improvements for wildfire exposure.
Properties with deferred maintenance or aging infrastructure are facing the steepest underwriting scrutiny. In many cases, relatively modest capital improvements can produce meaningful long-term insurance savings.
2. Start the Renewal Process Early
Waiting until 30 days before renewal is becoming increasingly risky. Owners should begin discussions with brokers 90–120 days in advance, particularly for larger assets or properties in higher-risk areas. This allows adequate time to:
- market the policy to multiple carriers,
- negotiate terms,
- address underwriting concerns,
- and avoid last-minute coverage limitations.
3. Consider Higher Deductibles
This decision should be evaluated carefully alongside cash reserves and overall risk tolerance, but there’s a good argument for reducing the scope of your insurance via a higher deductible, which will lower the premium. The premise of this argument is that insurance is a statistically bad bet for the average customer. In reviewing a few of the largest CRE property insurer’s income statements, I noted that claim payouts roughly represent 50% to 60% of each company’s revenue (i.e. for every dollar the insurer generates from its customer base, the average customer receives back only 50 to 60 cents); the rest of the revenue covers operating expenses, client acquisition costs, and company profit. That said, this does not mean that you should not buy insurance since there are perfectly logical reasons to do so, such as: (a) you are not in a position to bear the loss being insured, (b) you believe you have an above average propensity to incur the loss, or (c) the insurance is required by a lender or other interested party. Reasons (a) and (c) apply to most property owners so by no means am I arguing not to have property insurance, which is a necessity for most owners. However, there is a strong case for not doubling down on the statistically bad bet by having an unnecessarily low deductible if you are well-capitalized and can easily afford to have a higher one.
The Bottom Line
The insurance environment is unlikely to revert to being simpler and lower cost overnight, if at all, since insurers are expected to remain disciplined in underwriting and pricing. The most effective response is preparation. Property owners who proactively manage risk, maintain their properties, and engage with insurance professionals early and in an organized fashion will generally obtain the best outcomes.
