As we do each year, we are sharing our forecast for what we expect to happen with insurance premiums in 2025. First off, a bit of a history lesson…
Insurance is cyclical. There are soft markets, considered buyers’ markets, and there are hard markets, like we are in now, which are considered sellers’ markets. Insurance companies make money in two ways: underwriting income and investment income. Underwriting income is generated when premiums collected are greater than claims paid and other expenses. Insurance companies take the premiums they receive and invest them in low-risk investments like bonds. The investment income from those is the second way. When an insurance company isn’t making enough money or is unprofitable, a hard market results and premiums rise, insurance companies become more strict with life safety and other requirements, and their underwriting criteria become more stringent. Insurance companies don’t provide as many quotes, so in addition to an increase in premium, fewer quotes equals a higher premium. Basically, supply and demand. Eventually, the insurance companies start becoming profitable on their underwriting and investment income and decide they want more premium so they can invest it. This begins a soft market, and either carriers lower their premiums, or a competitor comes in and provides a lower quote to obtain the business. Again, supply and demand.
Typically, soft markets last longer than hard markets, maybe 5-7 years versus 2-3 years. This recent hard market, called the worst ever seen for real estate insurance, has been going on for about four years now. Prior to 2020, there had been a soft market or relatively stable insurance premiums for a number of years, as rates had been mostly flat, with relatively small increases at worst. That ended in 2020, with Commercial Umbrellas being the initial culprit. Since then, all lines of business have seen drastic increases. At a minimum, almost every insured has seen a 10-20% annual increase each of the past four years. Risks that were considered unfavorable such as those with losses, DOB or HPD violations, faulty electric, coastal property, or possibly just a very high Building Limit, may have seen much more significant increases.
Here is our forecast for each policy line for 2025:
Commercial Property
In the past two years, rates have increased as building limits have increased. Some of it was due to the cost of reinsurance, and some of it was due to the increase in the cost of materials and labor. Reinsurance is insurance that an insurance company buys from another insurance company. It’s kind of hedging the risk. Provide $50 million in coverage, but only put up $25 million of your own and pay another company to put up the other $25 million. It helps keep a stable marketplace by allowing insurance companies to have a backup.
Labor and materials have been increasing in the past few years, but there seems to be a softening in lumber futures prices, a major component of the cost to rebuild. If a building is adequately insured, then they may not face an increase in the Building Limit and thus may not see much, if any, of an increase in premium. However, many buildings are still underinsured. Insurance companies have been increasing the Building Limit upon renewal for their insureds, but many have been doing it on a step-up basis to avoid hardship, meaning doing the increase over a period of time, generally two years. So, there is the possibility that the insurance company and you agreed last year or the prior year to increase the course of time.
We are also seeing an increase in water-related deductibles, which are the most common claims an insurance company sees. Carriers used to have $5,000 deductibles or would match the property deductible, but now they have a separate Water Damage Deductible that is $10,000, $25,000, $50,000, and, in some cases, $100,000.
In addition, some carriers are now increasing or applying Wind Deductibles, which used to also be the same as the Property Deductible, but now may be higher, much like the Water Damage Deductible, and sometimes may be a percentage of the Building Value. Prepare to have higher deductibles across the board. One way to be prepared is to make sure all owners have Homeowners Insurance. Within an HO6 policy (homeowners policy for a condominium owner or co-op shareholder) is a coverage called Loss Assessment. As long as a peril is covered under the HO6, which many water damage and wind issues are, then if the board assesses the owners for the deductible, it should be covered under the HO6 policy once a policy term.
Newly constructed buildings and sprinklered buildings used to be all the hype, but the track record on newly constructed properties hasn’t been favorable. The industry joke is that a sprinkler system typically causes more damage than a fire (but on the flip side, it does save lives). Buildings constructed in the last five years may pay more than their identical neighbor who has been there longer.
Overall, we feel the commercial property sector should be considered more stable in 2025 than in previous years.
Forecast: Good risks, those with favorable loss history, little to no violations, and acceptable electric systems, may only see a 5-9% increase, assuming they are insured up to the replacement value required by the insurance company. Those properties who had difficulty the past few years and ended up in the Excess & Surplus Lines (E&S, a.k.a. non-admitted) market may actually be able to get back to the admitted markets and see an actual reduction in their insurance premiums! However, those risks who continue to have claims and violations are probably going to continue to see a premium increase of 20% or higher.
General Liability Insurance
General Liability continues to be an issue. There has been an uptick in both the severity and frequency of claims. Some of it is New York related like Labor Law Claims and claims related to the sidewalk and some of it is being seen country-wide, like Social Inflation.
Labor Law claims which are specific to New York are one of the main culprits. Besides an increase in the number of claims and payouts, insurance companies are having a much more difficult time tendering cases to the responsible contractor or subcontractor. Why? To recap, NY Labor Law (Section 240 & 241) pretty much holds the building owner strictly liable for construction-related incidents. Negligence on the part of the injured worker rarely factors in. New York is the only state that still has any law like this.
One of the worst claims an insured can have on their loss history is a Labor Law claim, and if it is open, it’s 10 times worse. Having just one of these claims on record could result in insurance premiums going up by 400% or 500% and those increased premiums could last for up to five years! Imagine paying an extra $1,000,000 in insurance premiums over a five-year period because a contractor was negligent and got injured. I have seen it happen!
This has caused insurance companies to become very diligent, requiring their insureds to ensure they have proper risk transfer when hiring a contractor. This includes making sure the contractors have adequate insurance coverage and that the contract between the contractor and the insured has proper wording that allows the insurance company the best possible chance of transferring the risk. If insureds don’t comply, the insurance company can and often will non-renew the insurance policy.
Our agency has a contractor review department for our insureds. We will review the insurance policy for any contractor that our client is hiring, along with the certificate of insurance. This is critical as the markets that write contractors have become a challenge, and it costs a pretty penny for contractors to have appropriate coverage, so many cut corners. That leads to claims that the insurance company cannot transfer and thus sit on the insured’s loss history.
In addition, in New York City, the onus of the sidewalk is on the property owner, and insurance companies are seeing more and more frivolous slip-and-fall claims. A slip-and-fall claim involves someone alleging they were injured when they fell on a sidewalk with a crack or defect. They sue the property owner adjacent to the sidewalk for negligence. In New York City, property owners are required to maintain the sidewalk outside their buildings and can be held liable if someone is injured on the sidewalk.
According to the National Insurance Crime Bureau, New York City is the number one city in the country for questionable slip and fall claims. Fake claims are causing insurance premiums to rise for building owners. There have been instances in which people have been seen analyzing the sidewalk, found a crack, and laid down next to it, saying they tripped and were injured. Doctors have been involved in these scams, performing unnecessary surgery.
Other instances involve people who have prior injuries and now have slipped and fallen, and the insurance company is left holding the bag for the prior injuries. One insurance company mentioned an incident in which an athletic person tripped and fell on a sidewalk. He needed surgery. It came to light at a later date that his surgery was needed because of prior injuries related to his athletic past.
Not all claims are frivolous. Many legitimate slip-and-fall claims are due to cell phone distractions. How is it the fault of the property owner if someone is looking down at their phone and trips and falls? Juries feel it is to the tune of six figures far too often.
Several insurance companies are discussing requiring properties to add CCTV systems that have Artificial Intelligence included and also backup recordings in the cloud for several years. Many of the older systems either record locally and/or store the recordings for 30-60 days. Many claims aren’t known until well after this period, and thus, the CCTVs are useless in these cases. As an incentive, one insurance company that specializes in real estate insurance is thinking of providing a 5% credit on the insurance policies to offset some, if not all, of the cost of the installation of the CCTV system. They will even provide a referral to a technician who can do the installation. I am sure other insurance companies will follow suit.
You may be thinking that you’re not located in New York, so why do the above paragraphs matter? Many of the same insurance companies that write in your state also write in New York. If their results are poor and they are unprofitable in one area, that is going to affect rates in all areas.
Lastly, the new kid on the block is Social Inflation. Social Inflation is a term you may have heard or probably will hear. It is a country-wide issue and is defined as increased awards by juries for numerous reasons, including distrust of insurance companies or “deep pockets”, or just a generational thing that continues to cause insurance company executives many sleepless nights. Claim payments and settlements have increased drastically in the past few years.
Forecast: On the low end, I would say insureds should budget an increase of 5-9% and properties who have any issues like unfavorable claim history, open claims or a Labor Law claim on record should budget 20% at a minimum.
Commercial Umbrella Insurance
Almost every co-op, condominium, HOA, or rental property that had an Umbrella had been insured in a Risk Purchasing Group (RPG) up until around 2021. An RPG is generally made up of various carriers, who make up various layers. If you have a $100M Umbrella, typically, you would have at least four carriers providing different layers and sometimes more. Over the past few years, many carriers have withdrawn from these programs, causing them to either pull out of the marketplace or reduce the amount of coverage that can be offered. Previously, almost everyone had high limits ranging from $25 million on the low end to $200 million on the high end and at very low premiums. We continue to see more and more insureds now with a $5 million or $10 million Umbrella because not only have the cost of the high limit (or all limit) umbrellas skyrocketed, but there are far fewer programs that can write the umbrellas and those who do, many insureds don’t qualify for one reason or another.
These programs are seeing more and more suits that are exhausting the underlying limit in the General Liability or D&O policies and are piercing the Umbrella. Labor Law claims, as mentioned under the Liability, are a large culprit, but so is social inflation, which was previously mentioned, and applies to all Liability suits and all states. We are hearing the term Nuclear Judgment more often. A nuclear judgment is typically a jury award that is more than $10 million or significantly larger than what was expected for the case. These have skyrocketed in the past five years.
More and more often, insureds are only eligible for an Umbrella with the same carrier that is providing the underlying General Liability coverage. The good news is that they are a solid option, and often, they don’t exclude construction/Labor Law claims, whereas many carriers do. The bad news is that sometimes these markets will not provide excess coverage over the D&O policy and can be quite costly.
Even if you’re lucky and are eligible for one of the RPG umbrellas, you are still going to see an increase, and more than likely, you may not get your new or renewal quote until a few days before, as these programs are overloaded with submissions. Overall, premiums are still increasing.
Forecast: 9% on the low end and often far higher.
Directors & Officers Liability Insurance
Similar to General Liability, there has been an uptick in claims over the past few years. D&O carriers, which typically are not profitable in several of the larger habitational states like New York, New Jersey, Florida, California, and Texas, began raising their rates by 10-20% last year.
Forecast: I would expect to see the same 10-20% increase this year.
Employee Dishonesty/Crime/Fidelity Insurance
It looks like rates will be stable for 2025. You may see a slight increase in premium simply because most limits are based upon three months of maintenance fees. As maintenance increases, the limit that is needed will increase, which will naturally result in an increase in premium. Since the premium for these policies is relatively small in most cases, increases are typically easy to handle.
Forecast: I would budget 5%.
Cyber Liability Insurance
Cyber liability is one of the fastest-growing insurance policies. While the premium for a co-op or condo is relatively low, we’re starting to see increases in this area as well. The reason is that we are starting to see more and more social engineering claims happening to community associations. Social engineering is basically being duped into paying hackers. These bad actors, as they are known, aren’t stealing the money, you are voluntarily paying them! These claims typically result because a hacker gets into someone’s system and then sends a request to whatever entity pays the invoices asking them to amend their banking information and when the bill is paid, it is paid to the hackers and not the real entity. Cyber Liability policies that include Social Engineering are raising their premiums and Cyber Liability companies who don’t include it are allowing insureds to add this coverage for an additional premium.
Forecast: I would budget a 10-20% increase in this area.
Overall Forecast: Overall, for 2025, I suggest budgeting a minimum of 10-15% increase in your insurance budget, which is much less than in previous years, but it all boils down to your building. There may be some properties that see an actual decrease because they have had such a rough go the past several years and are now a “better risk” because claims have been closed or have fallen outside the normal five-year window or violations have been closed.
What can you do to help offset premium increases?
- Raise your deductible. If you still have a $2,500 or $3,000 property deductible, increase it to $5,000. If you have a $5,000 deductible, increase it to $10,000. Claims are the single biggest reason insurance premiums increase. Not only does increasing the deductible result in a credit lowering the insurance premium, but it restricts you from submitting the smaller insurance claims. Claim frequency is a lot worse than severity. I generally tell insureds that one $100,000 fire loss is not nearly as bad as ten $2,000 water damage claims. With the latter, the insurance company feels that maintenance is poor, and it’s only a matter of time until there is a large claim.
- Think about installing water sensors or monitors. They may not catch all water damage issues, but they can catch some of them. There are a few companies out there who now specialize in them. One of them is Pro Sentry. It’s worth looking into as if it can even prevent one claim, it’s worth the money.
- Think about installing CCTV. Not only can you possibly get a credit on your insurance policy, but CCTV systems can also help throw out or drastically reduce a claim. Many times, an insurance company will settle with a claimant because there is little to no proof or evidence to defend the case.
- Require your owners to have homeowners insurance. All too often, an uninsured owner is damaged, and since they have no recourse, they sue the board/building, which results in a claim on record. Or the insurance company for the building pays to put the unit back to its original condition (minus improvements), whereas the homeowner’s carrier may have had some responsibility there. In addition, depending on the state you’re located in, your owners may be responsible for the association’s deductible. In New Jersey, the Condominium Act designates that affected owners are responsible for the deductible in a condominium. Plus, owners having insurance that includes Loss Assessment allows the association to go with a higher deductible and not have an out-of-pocket cost.
- Have your broker review contractors before you hire them. The largest liability claims, at least in New York, are related to injury to contractors. As mentioned, we have a separate department that does this for our clients, so ask your broker to do so. If they won’t, find a new broker!
Reach out to us anytime to discuss your policies, and be sure to sign up for our newsletter for more updates.
