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If you’re a real estate owner or investor, you may have noticed a significant increase in insurance costs compared to previous years. In fact, renewal increases have jumped 20% year-over-year, according to Q3 2020 data from Marsh’s Global Insurance Market Index, a measure of global commercial insurance premium pricing.

“This increased expense can affect a property’s net operating income (NOI) and thus its bank and appraisal valuation,” explained Matt Swerdlow, Director, Capital Services, Ariel Property Advisors. “Higher expenses and a lack of rent growth in NYC will lead to some borrowers facing difficulty in refinancing their existing mortgages. Because higher insurance costs eat into a property’s bottom line, this trend of climbing premiums is one that commercial real estate investors need to manage actively.”

Property and liability insurance for commercial real estate is usually bundled and provides protection against damage, fire, theft and third-party claims. Property insurance is one of the “must-have” items on a building’s expense list and the recent jump in insurance premiums raises the question of what exactly is causing these spikes.

“When it comes to insurance, today’s market has fewer carriers, less competition, less broad coverage and higher premiums,” noted Swerdlow. “Both global and local factors are creating this trend.”

First, today’s low-interest-rate environment is preventing insurance companies from achieving the typical level of yield they would expect through normal investment activity. Since today’s returns are not sufficient enough to cover existing settlements and new claims, carriers are forced to increase premiums to offset the difference while still creating shareholder value.