The CAT Zone Effect: Surging Costs in Commercial Property Insurance

Don’t believe everything you read about the lack of commercial property insurance capacity. It’s out there, with some caveats. The real estate axiom “location, location, location” remains a pillar in the capacity story, but it’s not the whole story. The quality and age of a building also play a role in commercial property insurance cost and availability, no matter where your property is located.

Here are the most common questions we hear in this challenging market, along with observations and tips:

What is a CAT zone?

A catastrophe zone—or CAT zone—is a geographic area with a history of natural disasters. Examples include Florida with its hurricane risk and California with earthquake and wildfire dangers. Getting property insurance in a CAT zone can be challenging.

We have commercial property in a catastrophe (CAT) risk zone. Will we be able to secure coverage?

In most cases, it’s possible to find an insurance solution. If your property is steel-framed and well-built, you will have an easier time securing coverage. This holds true even in states where some insurers are pulling out.

That said, coverage will likely be much more expensive and restrictive than in the past. Rates are rising proportionally to the number of catastrophic events across the country, not just in coastal areas.

Buildings in historically low-risk areas are now seeing property damage from extreme weather events. Excessive heat, tropical storms, snow and ice storms, tornados, wildfires, and drought are intensifying in many areas of the U.S.

Inflation has also affected capacity and pricing. Materials and labor, coupled with high interest rates, continue to drive up building costs.

Why does age matter in commercial property insurance cost?

State-of-the-art commercial property built in the 1960s, 1970s, and even 1980s is now approaching the end of its useful life.

Buildings and their systems naturally experience wear and tear as the years go by. Insurers know the cost to repair or replace will be expensive. Roofs — the main defense against weather-related damage — are a weak spot for an aging building. As reported in Business Insurance, insurers are taking a close look at the age and condition of commercial buildings’ roofs.

If insurers view a roof as inadequate for harsh conditions, property owners can expect limited coverage terms in their policies. Insurers may even request roof replacement as a condition of coverage.

At the time of construction, building codes may have been adequate. However, many jurisdictions have updated their codes in response to the increase in catastrophic weather events. It may be impossible or costly to bring an old building into compliance with today’s code.

Regardless of location, a post-2004 structure built to “Miami-Dade code” will qualify for better rates and terms than older buildings.

The property isn’t old, but it’s framed construction. Why is it so hard to get a quote?

Developers often choose the most cost-effective building material, which is usually wood framed construction. Framed construction is less desirable to insurance and reinsurance companies because it lacks the strength of steel. Wood is more susceptible to damage from weather events.

Carriers have treaties with reinsurance companies that allow them to provide coverage or offer quotes on certain construction types based on the building’s age. If you’ve got a Gulf Coast, Florida frame-built property, it may be difficult to get a quote. Put that same frame-built property in Charlotte, North Carolina, and it will be easier to find coverage.

When will we see easing of capacity restrictions and rate increases?

Both catastrophic weather events and economic forces cloud the crystal ball. That said, rate stabilization will start with newer, quality construction. Areas less prone to catastrophic risks will see capacity and rate improvements sooner. And once the insurance industry catches its breath, stabilization will branch out into the more difficult classes of business and locations. If inflation continues to calm along with interest rates, we will see additional improvements in commercial property insurance cost.

Meanwhile, don’t wait until two weeks before your property insurance renewal to act. Talk with your broker about getting an up-to-date replacement cost value for your property. Property appraisers have a significant backlog right now, meaning it could take weeks to get on their calendar.

Also, ask your broker about a property risk assessment. You want a comprehensive list of vulnerabilities, along with recommendations on how to mitigate them. If you take proactive steps to fortify your property, you make it more storm resilient and improve your insurance risk profile.