Commercial Property Insurance Faces Perfect Storm of Rising Costs and Shrinking Coverage

Written by:

Steve Marcinuk

Date:

07 Jul 2025

Share

Share via Facebook

Share via Linkedin

Share via X

Copy to clipboard

The commercial property insurance market is experiencing significant challenges as reinsurance companies retreat, weather patterns intensify, and data-driven underwriting reshapes risk assessment. For commercial real estate owners and investors, these shifts are making insurance a critical business consideration rather than just a routine expense.

The insurance industry operates on annual contracts, a fundamental reality that many property owners don’t fully grasp. “Insurance companies make sales, collect money, and pay out claims. At the end of the year, they either made money or they didn’t,” explains Darrin Gross, Commercial Real Estate Pro Network Host and a Portland-based insurance broker with over three decades of industry experience. “If they lost money last year, they’re going to make up for it next year by raising rates.”

This annual reset mechanism has become especially problematic as the industry deals with mounting losses from catastrophic weather events. The impact extends beyond the direct insurers that commercial property owners recognize, reaching into the complex world of reinsurance that underpins the entire system.

The Hidden Role of Reinsurance

Behind every commercial property policy lies a network of reinsurance companies that most property owners never see. These firms provide insurance to insurance companies, typically covering the higher-value portions of claims. For a property with a million-dollar coverage limit, the primary insurer might retain only $100,000 to $500,000 of risk internally, purchasing reinsurance for the remainder.

“In 99% of cases, losses are well below that reinsurance point where the insurance company you bought from takes the risk and pays the claim, while the reinsurance company remains unaffected,” Gross notes. However, this dynamic has shifted as catastrophic events increasingly trigger reinsurance coverage.

The reinsurance market’s annual pricing cycle creates a cascading effect throughout the industry. When reinsurance costs rise, retail insurers pass those increases directly to commercial property owners. More concerning for the market, some reinsurance companies have begun withdrawing entirely from certain risks.

“Recently, some reinsurance companies have said, ‘We’re going to sit this one out,'” Gross explains. “Instead of just having everybody raising rates, you now have less supply than before.” This supply constraint has created intense competition among property owners seeking coverage, giving insurers more leverage in selecting only the most desirable risks.

Weather Patterns Drive Market Changes

The insurance industry’s relationship with weather risk has changed from the historical perspective of isolated catastrophic events. That perception changed in recent years. In Oregon, the Labor Day fires of 2020 destroyed entire towns when wind combined with electrical sparks and abundant forest fuel. “We were smelling smoke for the better part of a month from all the fires,” Gross recalls.

The underlying meteorological changes are altering risk assessment across the industry. Warmer temperatures create drier landscapes while enabling weather systems to carry more moisture, resulting in both increased fire risk and more intense precipitation events. California’s water supply, once projected to take years to replenish, was restored in a single year of intense snowstorms.

Insurance companies and their data science teams are developing more sophisticated algorithms to identify and avoid high-risk properties. Properties near forests or other fuel sources face particular scrutiny, as do those in areas prone to severe weather events.

Data Science Changes Risk Assessment

The integration of advanced data analytics has changed how insurers evaluate commercial properties. “Data scientists are combing through data constantly, developing algorithms to figure out where they can write business without putting themselves at risk,” Gross observes.

This technological development has created what Gross describes as a comprehensive re-underwriting of the entire market. “I often say that every keystroke I’ve ever put in my computer is now being used against me,” he notes, referring to the vast databases that insurers now use to assess risk with greater precision.

The result is a market where insurers can be extremely selective, choosing only the lowest-risk properties from an abundance of applications. As property owners shop for better rates, they create additional opportunities for insurers to select the most desirable risks while rejecting or heavily pricing less attractive properties.

Age of Construction Becomes Critical Factor

Among the risk factors insurers evaluate, the age of construction has become a primary determinant of insurability and pricing. Properties built within the last 20 to 30 years receive significantly more favorable treatment than older buildings.

“The 30 years and newer seems to be much more agreeable to the marketplace,” Gross explains. “Some companies will say 20 years and newer.” This preference reflects the reality that newer buildings feature modern roofing, plumbing, electrical systems, and HVAC equipment, the four elements that generate the majority of insurance claims.

For older properties, insurers conduct increasingly detailed inspections of these systems. While circuit breakers were once sufficient for electrical systems, insurers now scrutinize specific brands of circuit breaker boxes that have proven problematic.

The age bias has created a divided market where newer properties enjoy relatively stable insurance options while older buildings face limited choices and higher premiums. This dynamic particularly affects value-add investors and owners of historic or older commercial properties.

Inflation Compounds Insurance Challenges

The insurance market’s struggles have been made worse by inflationary pressures affecting construction costs and materials. Insurance premiums must reflect replacement costs, meaning that as construction expenses rise, coverage costs increase proportionally.

“You can think of anything you’ve bought recently that’s three or four times more than what you remember paying for it,” Gross notes. “That’s consistent with insurance, because insurance is going to replace whatever you potentially lose.”

This inflationary pressure creates a compounding effect where property owners face both higher base costs for coverage and increased premiums due to market conditions. The combination has made insurance a significant variable cost that can materially impact property cash flows.

Market Cycle Shows Signs of Potential Relief

Despite the challenging conditions, Gross identifies early indicators that the market cycle may be beginning to shift. Some insurance companies are showing renewed interest in writing commercial property business, potentially signaling increased competition and more favorable pricing.

“We are starting to see signs and hear evidence that suggests some companies are coming back into the market,” he observes. “One of the easiest ways to gain business is to have a more attractive price.”

However, Gross cautions against expecting a return to historical pricing levels. The combination of inflation, enhanced risk assessment capabilities, and ongoing weather concerns suggests that any market improvement will be measured rather than dramatic.

The cyclical nature of insurance markets provides some hope for commercial property owners, but the current cycle includes unique elements that distinguish it from previous market fluctuations. The sophistication of data analytics and the persistent nature of climate-related risks suggest that some changes may be permanent rather than cyclical.

Strategic Implications for Commercial Real Estate

For commercial real estate professionals, these insurance market dynamics require strategic adaptation. Property selection criteria must increasingly factor in insurance availability and cost, particularly for older buildings or those in high-risk locations.

The market’s emphasis on building age and system condition creates opportunities for owners willing to invest in infrastructure upgrades. Modernizing electrical, plumbing, roofing, and HVAC systems can significantly improve insurance options and pricing.

Geographic diversification takes on new importance as insurers become more selective about regional exposures. Properties in areas with favorable weather patterns and low catastrophic risk profiles may command premium valuations due to their insurance advantages.

The insurance market’s shift from a routine expense to a critical business factor requires commercial real estate professionals to develop deeper expertise in risk management and insurance procurement. Working with experienced brokers who understand the evolving market dynamics becomes essential for navigating these challenges successfully.

As the commercial property insurance market continues to change, property owners and investors must adapt their strategies to account for these new realities. While the current environment presents significant challenges, understanding these dynamics positions real estate professionals to make informed decisions and identify opportunities within the changing landscape.