In recent years, catastrophic events like severe weather and natural disasters have had a greater impact on business property – and they’re occurring more frequently.
Natural catastrophic insured property losses in the U.S. totaled $98.8 billion in 2022 – up from $93.3 billion in 2021, making 2022 the third highest year of billion-dollar disasters.1
There were also a record-breaking 18 separate weather events that caused over $1 billion in damages in 2022, including:
- Hurricane Ian in September 2022, which resulted in $112.9 billion in damages and 152 deaths.
- Western and Central Drought and Heat Wave throughout 2022 causing $22.2 billion in damages and 136 deaths.2
"We're seeing increases in loss frequency from both catastrophes and non-catastrophic events across the globe," says Andy Simmons, head of large property at The Hartford. "This increase is causing insurance carriers to adjust the terms of their programs to share risk volatility with insureds.”
Sharing Risk With Customers
Carriers must balance premium and terms to create a sustainable insurance program. Insurance companies have been looking to improve underwriting results in a market that has become increasingly difficult to generate needed earnings, according to Caleb Woodby, underwriting officer for large property at The Hartford.
As insurance companies share risk with clients, it can result in:
- Higher renewal prices for customers
- Changes in program structure
- Increased deductibles
There are steps that policyholders can take to try to offset rate increases, like choosing a higher All Other Perils (AOP) deductible. This shares the risk between the insurance carrier and client.
"Sharing risk back to the insured through an increased AOP deductible, business insurance deductible or higher catastrophe (CAT) deductibles can provide for a long-term sustainable program," Woodby explains.
Insurance companies are also paying attention to loss trends during the underwriting phase, Woodby says. For example, more construction is pushing insureds to fringe areas in some states that can put them at higher risk of wildfire damage. And losses due to tornado and hail have also increased in the last five years. Insurance companies take these trends into account when writing new policies or during renewal.
"Underwriting guidance is changing to account for this dynamic," Woodby says. "More attention is being given to higher deductibles but also risk mitigation efforts for CAT perils, specifically percentage deductibles."
As commercial insurance rates continue to increase, carriers will continue to look at their programs to make sure risk profiles are appropriate and sustainable.
"There will continue to be a re-evaluation of terms and conditions in order for insurance carriers to manage loss ratio at a more predictable level across their portfolio for both CAT and non-CAT losses," Simmons says.
Three Ways to Help Minimize Your Risk and Reduce Losses
Insurance carriers can no longer postpone addressing the impact of climate change. Many insurers have begun providing incentives to encourage policyholders to invest in reducing climate-related risks.
Here are three steps business owners can take to help minimize their risks and prepare for natural disasters.
1. Protect Against Water Damage
Losses due to water damage have increased significantly, especially in the real estate, hospitality and health care industries. High-rise facilities, in particular, have increased risk of water damage. Prolonged periods of rain can result in water leakage that can damage multiple floors and elevator shafts.
Property losses aren’t limited to claims for structural damage, such as water damage inside a building. Losses can also include:
- Pérdida de ingresos
- Expenses to rebuild
- Cost of relocating residents during the repairs
Risks of prolonged water damage are prompting insurance carriers to increase the water damage deductible from $100,000 to $250,000. Insurers are also asking clients to create a water damage prevention plan to minimize risks.
When creating a water damage prevention plan, keep these things in mind:
- Establish your team and provide training
- Outline pre- and post-event job responsibilities
- Identify and label shut-off valves
- Create post-event restoration and recovery strategies
There are things business owners can do to help reduce their water damage risk and manage costs, such as:
- Inspecting high-risk areas for water damage, like interior systems and the roof, walls and floors.
- Checking the outside of the building for any damage or deterioration that can lead to water entering.
- Using technology to help monitor for any leaks.
2. Protect Against Wildfires
While the number of wildfires slightly decreased from 2020 to 2021, fire risk remains high. In 2021 alone, there were 58,968 fires damaging over 7.1 million acres across the United States.3
New construction and development are more likely to be near the fringes of wildfire areas in California, Texas and Colorado. Although lightning is the most common cause of wildfires, more humans are the cause of these disasters. Whether it’s by dropping a cigarette or improperly extinguishing a campfire, these actions can result in devastating damage.
Construction sites and business property can often have sources of ignition as well, like:
- Combustible materials
- Flammable liquids
To help protect your business property from fires, you can take these precautions:
- Secure an approved water supply for potential firefighting.
- Designate a smoking area or ban smoking from the site.
- Provide adequate portable fire extinguishers.
- Secure a permit for any work that requires a heat source such as welding, soldering or brazing.
- Establish process for using temporary heating equipment.
3. Protect Against Tornadoes and Hurricanes
In the past, damaging tornadoes were mostly confined to Tornado Alley, including:
- Northern Texas
- Dakota del Sur
More recently though, tornadoes are touching down outside of these states. Recent tornadoes occurred in Illinois, Arkansas, Mississippi, Alabama, Louisiana, Florida, Georgia, South Carolina, Minnesota, Tennessee and Kentucky, North Carolina, Virginia and Colorado with greater intensity. During 2022, there were 1,329 tornado reports, which is above the 1991-2010 U.S. annual average of 1,251 tornadoes. The most prolific months during 2022 for tornadoes were March, April, May, June and November, as each of these months reported 100 or more tornadoes.4
Hurricanes have also increased in intensity over the last few years. They’re becoming more frequent and stronger as a direct result of climate change.
To help protect your business’ property and reduce your losses during a severe storm, you can:
- Find an agent or broker who can help you secure the right policy for your needs.
- Use a battery-operated weather radio and keep extra batteries on hand, just in case.
- Establish a business continuity plan to identify essential employees that will respond in an emergency.
- Designate a safe shelter either on site or nearby.
- Tie down or securely store lumber and loose tools.
- Dismantle any scaffolding.
- Empty dumpsters or cover them with netting.
1 “Facts + Statistics: US Catastrophes,” Insurance Information Institute, October 2023
2 “2022 U.S. billion-dollar weather and climate disasters in historical context,” National Oceanic and Atmospheric Administration, January 2023
3 “Facts + Statistics: Wildfires,” Insurance Information Institute, October 2023
4 “Annual 2022 Tornadoes Report,” National Center for Environmental Information, October 2023