A month or two ahead of peak hurricane season, property insurance continues to top the news in Florida, where homeowners on the peninsula face the highest insurance premiums in the nation and desperate consumers have flooded state-backed Citizens Property Insurance Corp. to obtain policies. Insurers blame skyrocketing rates on losses from litigation claims, a rash of hurricanes and other storms, including last fall’s Hurricane Ian that caused more than $60 billion in insurable losses, and the reluctance of giant reinsurance companies to backstop primary carriers from potential losses. (See story, “An Island Unto Itself“.)

But while the homeowners’ market has gotten the most attention, commercial property customers have been reeling, too, as they navigate a challenging business insurance market.

U.S. commercial property insurance rates increased 20.4% in the first quarter, with inflation, high construction costs and natural catastrophes the main drivers, according to a survey from the Council of Insurance Agents and Brokers (Figure 1). The council doesn’t break out rates for Florida, but insurance agents, brokers and risk managers operating in the Sunshine State said premiums for many businesses have jumped 30%, 50% and higher. Some companies face premiums double or triple last year’s for property or builders risk insurance to cover structures ranging from older shopping centers to gleaming high-rise condo buildings under construction. And they’re finding policies not only with higher premiums but more limited coverage and higher deductibles.

Quarterly % change in U.S. rates indexed to fourth quarter 1999

Source: Council of Insurance Agents and Brokers

“The rates are insane,” said John Darr, who operates the insurance agency Darr Schackow in Gainesville. “It’s the hardest market I’ve ever been in.”

Imagine your insurance bill went up more than three times. Darr worked with the owner of a 60,000-square-foot shopping center previously valued at $6 million and insured for roughly $10,000 a year. This year the premium jumped to $40,000 because of a combination of higher rates and the insurer’s refusal to cover the property for less than a revised replacement cost of $9 million. “They just play hard ball,” Darr said.

Today’s market is the opposite of the soft market back in 2017, when insurers were in a decadelong competitive frenzy and premiums fell in some years. That was during a lull in hurricane activity. But a spike in natural disasters starting with Hurricane Irma in 2017 raised concerns that many carriers had badly underpriced property policies and that they needed to get tough on rates.

Insurance costs for commercial real estate are also spiking because insurers are more closely scrutinizing the values of properties. Lockton Cos., a big insurance broker, reported replacement values of insured properties have often been underrepresented by 30% or more relative to the cost to repair and replace damaged property. Because property premiums are calculated on a value basis, a 15% increase in valuation plus a 30% rate increase results in a 50% jump in premiums.

Developers seeking builders insurance on new projects are forced to seek the same amount or even less coverage from a greater number of insurers — and at a higher price — to reach the replacement cost protection required by lenders. Fred Zutel, president of property and casualty in Miami for Lockton, said he layered policies with more than two dozen insurers to cover the 1,000-foot-tall Waldorf Astoria residential tower being built in downtown Miami. “It’s getting worse,” Zutel said. “Rates are going up significantly and the capacity is constrained. There are fewer insurance companies charging higher prices, which means you are going to pay more.”

Andrew Cohn, risk manager for Miami-based Related Group, one of Florida’s biggest builders and operators of condominium towers and apartment buildings, said in some cases apartment buildings in South Florida that would have paid 25 cents per $100 of replacement cost to insure a couple years ago are now paying 85 to 90 cents per $100. Related Group has roughly 80 properties to insure, including existing buildings and those under construction, with many located in hurricane-prone Miami, which has reportedly the strictest U.S. building codes. “It’s a bit of surprise. I understand why they’re doing it,” Cohn said of the jacked up rates. The catastrophic models insurers rely on to gauge risk show increased probability of damages from hurricanes and other natural disasters and higher replacement and repair costs.

Even churches are not spared the hardships. In June, Bishop William Wack of the Pensacola-Tallahassee Diocese said as a result of giant insurance rate increases, the diocese was unable to cover its many churches and buildings for the first $25 million of catastrophic windstorm property loss, according Crux, a news organization that covers the Catholic Church. Simply put, it’s now self-insured for the first $25 million per storm and is assuming “significantly more risk.”

Lack of capacity is a big factor because as reinsurers have less appetite to carry risks in Florida their insurance customers are simply unable to write policies. Also, consider that reinsurance companies — which provide vital backup coverage to primary carriers — play on a global stage and provide stopgap protection for risks worldwide, meaning they’re on the hook to pay damages caused by not only by Florida hurricanes but everything from western wildfires and California floods to polar vortexes and tornados.

Businesses are seeking to limit premium increases in many ways, including reducing coverage amounts, accepting higher deductibles and establishing captive insurance entities to provide some of their own insurance, said Jimmy Clark, executive director of the Southeast real estate and hospitality practice for Gallagher, one of the world’s the largest insurance brokers.

Alternatives

Big organizations, including government institutions, have been self-insuring for many years. For example, the University of Florida insures 2,063 buildings statewide with a collective replacement value of $5 billion through the State Risk Management Trust Fund, which self-insures all state-owned buildings and contents, said Brian Hall, UF’s risk manager.

Related Group is considering forming its own captive insurance company, Cohn said in June as he prepared to travel to Bermuda to meet with reinsurers that would insure any captive it formed. “Pricing is still high,” he said. “I’ve been looking at every creative avenue I can find for every property.”

To cover special risks, some companies are even exploring parametric insurance, a relatively new product. While traditional insurance pays out only for actual damage or loss suffered by a policyholder, parametric insurance pays based on a specified trigger, such as when floodwaters rise to a certain height or a windstorm blows a certain speed. For example, a waterside restaurant in Dunedin recently signed up for a parametric policy, according FloodFlash, which opened an office in Naples to sell parametric flood insurance. FloodFlash declined to name the restaurant but said the customer would be paid quickly if floodwaters reached 28 inches or more on a sensor. “Previously, the business had private flood insurance but the increased premiums in recent years became too much and they needed to find additional options,” a spokesperson said.

In contrast, Related Group decided against the idea of using parametric insurance to cover some of its risk. Quotes for coverage that would pay off when a building was struck by, for example, a category 4 hurricane were “way too high for the risk,” Cohn said.

Surplus market

Representatives of large companies and insurance specialists hardly mention the most common alternative they rely on increasingly to insure commercial property: Excess and surplus (E&S) carriers.

E&S insurers provide businesses policies that more highly regulated “admitted” insurers won’t touch, typically because the needs are more complex or represent higher risks. In theory, going to an E&S carrier also means more risk for the insured. That’s because rates and policies of E&S carriers are not approved by the Florida Office of Insurance Regulation and policies are not covered by the Florida Insurance Guaranty Association (FIGA), which pays claims of insolvent insurers.

S&P Global Market Intelligence data shows E&S carriers’ share of the Florida commercial property market has more than doubled since 2017 and now makes up nearly 45% of the market, not including allied and fire lines (Figure 2). This is a higher percentage than any other state, said Tim Zawacki, principal research analyst at S&P. While the share is roughly 10% in other states, hurricane-prone areas along the Gulf Coast such as Louisiana and Texas have a large percentage of E&S carriers, too. Florida E&S insurers’ growth in premiums has also far outpaced standard carriers (Figure 3).

Dave Demott, president-elect of the Florida Surplus Lines Association, said though not covered by FIGA, E&S insurers meet state financial requirements and they are generally highly rated and well capitalized. While six property insurance companies in the admitted market were declared insolvent by state regulators in 2022, officials with the Florida Surplus Lines Service Office could not find a record of the last E&S commercial property carrier to fail in Florida. The office’s data shows that underwriters for the massive global syndicate of Lloyd’s of London controlled 18% of E&S commercial insurance property, liability and builders risk insurance market with $1.3 billion in premiums in 2022.

For the same policy and coverage, E&S carriers won’t offer as competitive rates as admitted carriers. But Demott emphasized that’s by design as they insure higher-risk properties standard carriers won’t take on. He cited as examples an ax-throwing bar, a $100 million condo tower near the Florida coast and a strip shopping center in Tampa built in 1968 that has 15-year-old roof and several restaurants as tenants. “Where does it go for the coverage that is needed because they have a loan on the structure?” he said. “Take the same risk in Missouri and it is probably admitted easily, as there is limited to no CAT-related (catastrophe) risk.”

Indeed, some property sectors such as apartments find E&S the only game in town. “For as long as I’ve been in the market in Florida excess and surplus lines have been the only option,” said Chris Conlon, director of risk management for Mahaffey Apartment Co. The St. Petersburg-based company saw its premium jump 50% this year for a master policy to cover nine of its Florida apartment communities. Not only did the rate increase but the total replacement cost jumped 29% to about $900 million. Also, the maximum payout for any wind damage was lowered to $35 million from full value last year. Separately, it had no choice but to purchase a Citizens’ policy to insure a 2007 apartment complex in Polk County at a premium twice last year’s and with more restrictions, such as no coverage for potential loss of rental income.

It may not be by design but E&S is mainstream in Florida and may soon represent the majority of the commercial property insurance market. “We don’t have data to support this yet, but anecdotally it seems like the situation in Florida has only gotten more challenging from coverage availability and affordability perspectives,” Zawacki said. He added he wouldn’t be surprised if E&S carriers took more than half of the nonhomeowners property insurance business in Florida this year.

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Commercial property coverage alternatives

Excess and surplus lines: Provides coverage for businesses with uniquely complex needs or high risks. Rates and forms are not approved by the Florida Office of Insurance Regulation and policies are not covered by the Florida Insurance Guaranty Association, which pays claims of insolvent insurers. Florida policies are subject to a tax and service charge of 5% paid to a state-licensed surplus lines agent, who remits taxes to the Florida Surplus Lines Service Office.

Captives: A special type of insurer created by a company, organization or group of companies to insure risks. It’s among alternative risk arrangements that include self-insurance, and risk retention and risk purchasing groups.

Parametric insurance: Covers property based on an objective measure of the magnitude of an event instead of the traditional way of paying for actual damage or loss suffered by a policyholder. For example, parametric insurance pays when winds reach a certain speed or floodwater reaches a specified stage regardless of whether there is any damage.