The market for commercial property insurance continues to be challenging, especially in regions like California that are highly susceptible to natural disasters. As outlined below, several factors contribute to premium increases for commercial property coverage, and these are particularly pronounced in California due to its unique climate and geographical characteristics.

Factors Contributing to Premium Increases

• Catastrophe Losses. California faces an array of natural disasters, including wildfires, earthquakes, and floods. The frequency and severity of these catastrophes have significantly stressed the insurance industry. Over the past four years, annual insured losses globally have exceeded $100 billion, with California contributing substantially to these figures due to its wildfire seasons and seismic activity. In 2023 alone, total insured losses globally were a staggering $118 billion, with severe convective storms accounting for 58% of the losses globally.
• Reinsurance. Although reinsurance capacity improved in 2023 and into 2024, the cost of available reinsurance capacity remains high. The continued impact of catastrophic events is a major factor driving up costs, along with the increasing cost of capital, financial market volatility, and inflation. These expenses inevitably get passed on to consumers. For California, which has a high exposure to natural disasters, reinsurance costs are a significant burden on insurance carriers.
• Underinsurance. Due to the high cost of living and material costs in California, insured property replacement values continue to lag. Just 43% of business owners nationwide have increased their policy limits to accurately reflect current replacement costs. In California, this issue is exacerbated by the high costs of construction and rebuilding, which can lead to significant gaps in coverage after a loss.
• Property Replacement Costs. Nonresidential construction costs in California have soared, driven by a 65% increase in fabricated structural steel and a 37% increase in the price of concrete products over the past four years. Machinery and equipment costs have also risen by 22%. These increases are compounded by a lingering supply chain disruption that continues to affect rebuilding efforts post-disaster.
• Skilled Labor Shortage. Nearly half of construction costs are wages and salaries, which have increased by 22% over the past four years. Despite higher wages, 77% of contractors are struggling to find skilled labor. This shortage results in higher rebuilding costs and longer delays, potentially increasing business interruption losses.
• Property Rate Need. Escalating loss trends, particularly from catastrophes, severe weather, and large fires, have outpaced rate increases. Insurers are expected to raise rates again this year to close the gap between escalating costs and premiums.

California: A Hotspot for Billion-Dollar Disasters

2023 was a historic year for billion-dollar weather and climate disasters in the U.S., with California bearing a significant brunt of these events. There were 28 weather and climate disasters costing at least $1 billion each, surpassing the previous record of 22 in 2020. The total cost of these disasters was $92.9 billion, with California experiencing notable impacts from wildfires and floods.

• Wildfires. Wildfires are a persistent threat in California, with the 2023 wildfire season being particularly devastating. The historic town of Lahaina on Maui Island was destroyed by a firestorm exacerbated by winds from Hurricane Dora, resulting in $5.6 billion in damages and making it the deadliest wildfire in the U.S. in over a century. California’s vulnerability to wildfires is heightened by prolonged droughts, high temperatures, and strong winds, which create perfect conditions for fires to spread rapidly.
• Flooding. California also faced significant flooding events in 2023, particularly in areas that were unprepared for the deluge. Flooding in California and Florida accounted for substantial portions of the total disaster costs for the year. The state’s complex topography and variable climate make it susceptible to both coastal and inland flooding, which can cause widespread damage to properties and infrastructure.
• Impact on Insurance Carriers and Rates. The increasing frequency and severity of natural disasters have led some insurance carriers to withdraw from the California market, unable to sustain the high losses and claims payouts. This exodus reduces the competition in the insurance market, leading to higher premiums for consumers. In some areas, property owners struggle to find any coverage at all, pushing them to rely on the state’s insurer of last resort, the California FAIR Plan, which often comes at a higher cost and with limited coverage options.

Ways Property Owners Can Mitigate Risks

Property owners can mitigate risks and protect their properties by focusing on proactive maintenance and safety protocols. Some key strategies include:

• Regularly updating electrical, plumbing, and HVAC systems to reduce fire and water damage risks.
• Implementing fire prevention measures, such as installing fire-resistant materials, trimming vegetation, and creating defensible spaces around the property.
• Installing advanced security systems, including alarms, cameras, and lighting, to deter theft or vandalism.
• Conducting regular property inspections to identify and resolve potential hazards such as roof damage or foundation cracks.
• Keeping insurance appraisals current and ensuring building valuations align with actual replacement costs, reducing the risk of under-insurance.

Top Considerations in Property Insurance for 2025

In 2025, the top issues facing property insurance will likely include continued premium hikes due to the increasing frequency of natural disasters, especially in high-risk areas like California. Carriers may continue to pull out of certain regions, forcing more property owners into expensive, surplus lines. Additionally, rising construction costs and inflation will further drive up the costs of rebuilding and replacement, making accurate valuations more important than ever. Lastly, regulatory changes could impact the market as state governments grapple with balancing consumer protection and insurer sustainability.

The challenges facing the commercial property insurance market are multifaceted and particularly acute in disaster-prone areas like California. With the increasing frequency of billion-dollar disasters, both insurers and property owners must adapt to a rapidly changing environment. By understanding the factors driving premium increases and taking steps to mitigate risks, stakeholders can better navigate the complexities of the property insurance market and work towards a more resilient future.

Written by Joe Nowarski, Managing Partner, Kern Insurance Associates

The author, Joe Nowarski, is an accomplished insurance professional with 30+ years of experience in the industry. He has established himself as a trusted advisor for clients seeking expert guidance on insurance policies, underwriting, and risk management. His experience has been vital to his success as the Managing Partner at Kern Insurance Associates, a PCF partner. For more information, call Mr. Nowarski at (661) 835-4542 or go to www.Kern.com.