Insurance costs for commercial buildings throughout the United States are being significantly impacted by climate-related disasters, with California hit especially hard. According to the National Oceanic and Atmospheric Administration’s (NOAA) National Centers for Environmental Information (NCEI), there were 27 individual weather and climate disasters with at least $1 billion in damages in 2024, trailing only the record-setting 28 events analyzed in 2023. As Californians know all too well, 2025 opened with the LA wildfires. Actuarial firm Milliman estimated the insurance industry losses for the Palisades and Eaton fires alone at $25.2 billion to $39.4 billion as of mid-February. These fires and other climate-related disasters are leading to higher premiums, potential uninsurability, and insurers pulling out of the market, particularly in high-risk areas.
AIR CRE recently held a “Town Hall” webinar, “California Commercial Insurance – Strategies for a New Era of Risk,” that took a deep dive into the changing landscape of commercial property insurance, particularly in California. Moderated by Tim Hayes, Executive Director of AIR CRE, The Liberty Company Insurance Brokers panel featured Gary Wells, Managing Partner and Codirector, Jeffrey Shibata, Executive Vice President and Director of Insurance Operations, and Jeff Knowles, Senior Account Executive and Codirector.
What’s Driving Commercial Property Insurance Costs?
Wells outlined the six issues that the insurance industry is facing:
Catastrophic Losses: Natural catastrophes like hurricanes, floods, and wildfires are driving up premiums. In 2023, global insured losses reached $118 billion, with severe convective storms (SCS) — heavy rain, thunderstorms, lightning, large hail, and severe winds — accounting for 58% of these losses.
Reinsurance Costs and Capacity: The rising reinsurance costs are passed on to customers, due to the increasing frequency of catastrophic weather events and broader financial market pressures.
Underinsurance: Many properties remain underinsured due to rising construction costs not being reflected in policy limits. Property owners must update asset valuations to ensure adequate coverage.
Property Replacement Costs: The cost of rebuilding properties has increased, driven by rising material prices and supply chain challenges. These higher costs push premiums upward.
Skilled Labor Shortage: A shortage of skilled labor and rising wages contribute to higher rebuilding and repair costs, which raises insurance premiums.
Property Rate Need: Escalating loss trends driven by natural disasters and severe weather have outpaced the rate increases necessary to cover these losses, leading to higher premiums.
The increase in climate-related disasters (hurricanes, floods, wildfires, tornadoes, and winter storms) — exacerbated by a dramatic increase in the frequency and intensity of severe convective storms over the last few years — has caused catastrophic losses. “These are causing a lot of issues throughout the country and in areas that we just haven’t seen before,” said Wells.
Reinsurance costs (essentially insurance for the insurance companies) have been driven up, particularly in disaster-prone areas like Florida, the Gulf Coast, and now Southern California due to wildfires and mudslides. Wells adds that underinsurance has become a major problem, as only 43% of business owners have raised their policy limits to match current replacement costs. “Insurance carriers have now realized that there is a major issue with underinsurance, and what they’re trying to do is get everything in their book of business up to 100% replacement cost value,” said Wells. “We’ve seen massive spikes in the insurance carriers increasing these costs to 100% of Marshall & Swift values (the industry standard appraisers).”
Property replacement costs have also soared as overall non-residential construction costs have surged by 37% over the last four years. One of the drivers is labor costs (which comprise over half of construction costs), as wages increased by 22% during that period. Making matters worse, 77% of contractors report a shortage of skilled labor.
Carriers are expected to raise rates again this year. Wells made this dire prediction: “We’re expecting to see this continue this year and next year, and as far as we can see, there’s really no end in sight.”
The Insurance Companies Reaction
Shibata said insurance companies are responding to the increase in catastrophic losses due to climate-related disasters by becoming more risk-averse and using big data to gain more insight into what they’re insuring. They’re using third-party sources that provide scoring based on wind, hail, lightning, wildfire, and crime exposures. They’re also looking at public databases to review building permits and safety inspections, Google Maps to look at building photos, and satellite photos to determine the condition of roofs, etc. With the increased scrutiny, larger carriers like Hartford, Allianz, and Liberty Mutual are becoming more selective in their underwriting approach, preferring newer or upgraded properties.
“They are trying to eliminate what they consider higher risk on their books,” said Shibata. He cited one insurance carrier that stopped renewing properties within a one-mile radius of brush last year. This drives many properties into alternative insurance markets, such as surplus lines carriers or government-backed insurers like the California Fair Plan, often with higher premiums and limited coverage. Also, insurers are shifting more risk to policyholders through exclusions, higher deductibles, and mandatory loss control recommendations.
The California Insurance Market
“In California, we have a widely recognized insurance crisis,” said Shibata. He cited the exits of Allstate and State Farm from the market and other carriers to severely reduce their underwriting in the market, particularly for older buildings, those in wildfire-prone and marginal wildfire-exposed areas. “The industry has really changed its view of what a wildfire area is… People never thought of places like Santa Rosa as a wildfire area. But after the wildfires caused by the convective winds, the models changed considerably, and this withdrawal has resulted in a reduced supply of insurance — even though demand remains very high,” he said. Shibata noted that this year’s damage from California fires alone has been estimated at between $135 and $150 billion.
The California FAIR Plan provides Californians basic fire coverage when coverage from a traditional carrier is unavailable. The program is facing significant financial strain due to recent wildfires. The FAIR Plan estimates a potential exposure of over $4 billion for the Palisades Fire alone, so property owners in high-risk areas should be prepared for potential coverage gaps and rising premiums.
“Fair Plan has significantly increased their rates because they are trying to get enough premiums to cover their losses,” said Shibata. “How this will all work out (we don’t know) because the changes and information we’re getting are coming in so rapidly that I think it’s safe to bet that it will cause further reduction in capacity and what capacity there is going to come at a price.”
Best Practices for Building Owners and Property Managers
Knowles prepared a list of best practices for building owners. The first order of business is to implement risk management loss control programs, either internally or through an insurance broker.
Document Physical Updates: Knowles urges owners to maintain detailed records of property updates, such as renovations and repairs, to help ensure that the coverage reflects the property’s true value and to reduce risks.
Conduct Regular Inspections: Property owners should schedule regular inspections to demonstrate to insurers that their properties are well-maintained.
Capital Expenditure Plans: Regular capital investments, especially in key systems like roofing, electrical, and plumbing, can help reduce insurance risks and costs.
Risk Management and Loss Control: Property owners should implement robust risk management programs and maintain emergency preparedness plans to mitigate risk and potentially reduce premiums.
Master Policies for Multiple Properties: Bundling properties under a master policy can simplify coverage and may result in savings, particularly for properties with similar risk profiles.
“On these older buildings, they want to see that you’re having it regularly updated, maintained, and inspected,” said Knowles. “Perhaps a letter from the electrician stating that the electrical panels are in good working order and show no signs of wear and tear. For capital expenditures, they want to see owners actively investing money in the building and making improvements — roof, electrical, and plumbing updates are the big three.”
Strategies for Insurance Programs and Renewals
Align with Lender Requirements: Ensure insurance policies meet the lender’s requirements, including coverage limits and exclusions.
Develop a Tailored Strategy: Customize your insurance plan to meet the lender’s needs, using risk assessments and data analytics to make informed decisions.
Collaborative Approach: Open communication between property owners and lenders ensures both parties can identify risks and develop effective mitigation strategies.
Optimize Coverage & Costs: Balancing comprehensive coverage with competitive premiums requires working closely with brokers to navigate exclusions and underwriting challenges.
Master Policies and Risk Pooling: Consider bundling properties under a master policy to reduce premiums and explore joining risk purchasing groups for better coverage options.
Building owners must be proactive with escalating climate risks and a rapidly evolving insurance landscape. Property owners can navigate these challenges and safeguard their investments — even in an increasingly unpredictable environment by implementing robust risk management strategies and maintaining open communication with insurers and lenders. For additional information on mitigating risk of higher insurance rates read our previous blog post.