Evolving risks make accurate property values essential

The commercial property insurance is a marketplace in transition. After several years of steady rate increases by insurers seeking to address persistent, negative loss trends, a two-year reprieve in significant property damage from hurricane landfalls has prompted new capacity to enter the market. Customers and brokers are pressing for rate relief. As a result, competition for commercial property business is heating up among insurance providers pursuing aggressive growth goals.

However, this transition is occurring at a time when another part of the business climate – the growing threat posed by severe weather events – is itself in transition, presenting insurers and customers with an intensifying risk environment on an almost daily basis.

Data from the National Centers for Environmental Information (NCEI), part of the National Oceanic & Atmospheric Administration (NOAA), suggests that any celebration over a perceived slowdown in billion-dollar loss events may be premature. Through early August 2024, NOAA identified 19 separate billion-dollar weather events in the U.S., including 15 severe storm events (tornado outbreaks, high wind, hailstorms), one tropical cyclone (Hurricane Beryl), and two winter storm/cold wave events. Since that early August report, the U.S. was struck by another tropical cyclone, Hurricane Debby, causing catastrophic flooding across Florida and up the east coast of the U.S.

Looking at historical data from 1980 to 2023, the annual average of billion-dollar-plus loss events, adjusted for CPI, was 8.5 per year. More recently, the annual average for the five-year period from 2019 to 2023 has been 20.4 events. If trends hold, this puts 2024 on a trajectory to exceed the five-year average for billion-dollar CAT events.¹

Source: NOAA National Centers for Environmental Information (NCEI) U.S. Billion-Dollar Weather and Climate Disasters (2024). https://www.ncei.noaa.gov/access/billions/, DOI: 10.25921/stkw-7w73

In recent times, severe weather loss data has been driven by what insurers refer to as “secondary perils.” These are phenomena such as severe convective storms, tornados, derechos, hail, flooding, etc., weather events that can have dramatic loss impacts even in lieu of major tropical storms and hurricanes. Potentially complicating the short-term outlook is a forecast by NOAA’s National Weather Service Climate Prediction Center for above-normal hurricane activity in the Atlantic basin during the 2024 hurricane season (June 1-November 30), with 17-25 named storms and 8-13 hurricanes, of which 4-7 could be majors.²

The message embedded in NOAA’s data is clear. Whether at risk from a rising tide of secondary perils or more frequent, major hurricanes, no customer in North America can afford to take unwise risks with their commercial property insurance portfolios, their property valuations and the value of the risk management tools their insurers offer to mitigate the worst effects of a changing climate. In addition, if the predictions by NOAA and other climate science organizations hold true, it is unlikely that the additional capacity entering the commercial property market today will be there tomorrow.

Any period of transition, whether economic or climatic, is often fraught with uncertainties. That is why one of the most important tasks facing underwriters and risk managers at any time is ensuring that accurate values are reflected in the commercial property insurance contracts to help protect customers’ assets. Developing accurate value statements at inception and on an ongoing basis will help ensure that everyone understands the risks covered, the retentions written into the program, and the potential exposures to the customer’s bottom line.

While inflation is down from its Covid-era heights, the costs for everything insurance pays for remain high, and supplies of some materials remain constrained in part due to the present infrastructure boom. All of which contribute to the need to maintain accurate valuations to help ensure sustainable risk management results over time.

Why accurate values matter

Accurate valuations are important for a variety of reasons. For one, valuations are routinely used for modeling the potential effects of NAT CAT events, enabling models to determine the limits businesses need to adequately help protect their assets. For another, values will help determine the deductibles that will apply in high-hazard events and are critical in accurately setting policy limits. Finally, values are used to prioritize risk improvements. If loss estimates are not accurate due to inaccurate values, a significant exposure may be left unidentified, potentially giving the risk manager an unplanned retention or an unexpected, underinsured loss.

To help brokers and risk managers understand the assumptions that go into determining values by region, each year Zurich North America publishes a report compiling Replacement Value Cost Trends. On a positive note, the preamble leading off the 2024 edition indicates that current building cost trends remained stable through 2023, with most of the U.S. showing relatively little movement in construction costs. While material costs moderated due to declining inflation, costs still remain significantly higher than pre-pandemic levels. At the same time, labor rates are increasing, and a tight labor supply continues to be a concern.³

Accuracy ensures sustainability

For customers and insurers, maintaining accurate valuations is more than just an exercise affecting rate adequacy and premiums. Accurate values are fundamental to allocation of capacity, reinsurance decisions, the setting of sub-limits and deductibles, and CAT modeling. And correct property valuations help to ensure protection against surprises during a time of evolving climate risks.

Risk engineering professionals also depend on accurately stated values when performing onsite risk assessments. A full understanding of the total insurable values of a customer’s property, inventory, equipment and potential business income at risk has a major bearing on loss expectancies. The goal of risk engineers is to assist customers in risk management, so they use loss expectancies to develop risk-mitigation plans. If the values at risk are in a range acceptable to the customer and carrier, a loss-mitigation plan will do a much better job helping a customer recover from an event, including a claims payment that accurately reflects the loss. If the valuation is out of date or inadequate, the loss may be seriously underinsured.

Monitoring loss trends and their potential impacts on customer valuations is also important in maintaining and ensuring sustainable risk management solutions. Zurich’s own approach is data-driven, continuously evaluating actual losses compared to engineered Probable Maximum Loss (PML) assumptions to ensure that our assumptions are staying ahead of emerging trends. To assist, we created a global project to ensure that our engineered PML estimates are globally consistent and that they are influenced by the trends we see with actual losses.

For example, among the loss trends we have identified as historically understated are those due to smoke damage, including variables by occupancy. As a result, we encouraged the NFPA to change the code requiring new parking garages to be sprinklered, which is reflected in the latest version of the code. This was intended to help reduce the impacts of toxic smoke damage in attached/adjacent and structural damage to the parking structure due to the evolving risks associated with the amount of plastics in vehicles (including fuel tanks), lithium-ion batteries, and charging stations.

Keeping values current

Underwriters also pay close attention to year-over-year valuation changes to assess how customers are managing their statements of value, and the degree to which those statements of value support the policy terms and conditions provided. If renewal valuations have remained relatively flat for several years, especially in a time of inflation, there is a strong likelihood reported values may be out of alignment and no longer representative of the true extent of the customer’s exposures. This is particularly true if the account has added new locations or new equipment and other key assets since the last valuation.

The combined effects of lingering inflation on replacement costs, shortages of skilled labor for repairs and reconstruction, and the persistence of supply chain issues in some industries can dramatically affect the values a customer has at risk. Costs can be further impacted in cases when property grandfathered into old building codes may need to be brought up to current code for that jurisdiction.

Accurate values matter in any business environment

Current trends appear to suggest that both inflation and supply chain disruptions may be easing, with hopes for a return to price stability on the services and materials for which insurance policies reimburse. However, any easing of economic stresses does not reduce the importance of reporting accurate values in the insurance process. Even during a period of declining inflation, a property incorrectly valued could be seriously underinsured. And in the event that billion-dollar loss trends continue in the wrong direction, the new, opportunistic capacity entering the commercial property market today may be gone tomorrow. Maintaining accurate values as part of the foundation of trust with an insurer will make it far more likely that stable capacity will remain available to a customer when times are lean.

Customers are encouraged to reach out to their brokers and underwriters to gain clearer understandings about the effects that current trendlines may be having on large-property insurance programs, and why accurate valuation statements are integral to a successful risk management program.

1. “Billion-dollar Weather and Climate Disasters.” National Atmospheric & Oceanic Administration (NOAA). National Centers for Environmental Information (NCEI). August 8, 2024. NOAA National Centers for Environmental Information (NCEI) U.S. Billion-Dollar Weather and Climate Disasters (2024). https://www.ncei.noaa.gov/access/billions/  DOI: 10.25921/stkw-7w73
2. “NOAA predicts above-normal 2024 Atlantic hurricane season.” National Atmospheric & Oceanic Administration (NOAA). May 23, 2024.
3. Zurich Replacement Value Cost Trends. Zurich North America. January 2024.