Key drivers behind changing commercial property insurance costs for owners 

Introduction

The recent wildfires in the Los Angeles area have brought attention to the greater frequency and scale of wildfires as well as the implications for residents and their homes, insurance companies, and governments.  

While commercial properties in the U.S. have not been as impacted by wildfires as homes have, they nevertheless are subject to higher risk from wildfires and other natural disasters than in the past. In recent years, most insurance companies that insure commercial properties have updated their underwriting and terms of coverage related to natural disasters, with owner insurance costs significantly rising:

Overall commercial property insurance cost as share of income

From 2017-2022, insurance costs increased significantly more than other expenses. While insurance costs grew 73% during this period, utilities grew by 40%, property taxes grew by 27%, and other expenses grew by 29%.  

Where regulations do not permit insurance companies to earn a satisfactory risk-based return, insurance companies might operate outside of regulations or exit the market, stressing commercial property valuations.

In this environment, it is critical that current and prospective commercial property owners seek to minimise current insurance costs and gain a deeper understanding of potential future insurance costs and availability. In this piece, I will identify some drivers of insurance costs that current and prospective commercial property owners should pay attention to and actions that they can take with this knowledge to enhance returns.

Drivers of insurance costs

Natural disasters

The U.S. has been experiencing a growing number of large-scale natural disasters. The 1980–2024 annual average was 9.0 events while for the most recent five years (2020–2024) the annual average increased to 23.0 events.

Source: NOAA National Centers for Environmental Information (NCEI) U.S. Billion-Dollar Weather and Climate Disasters (2025), DOI: 10.25921/stkw-7w73

Perceived increased risk of natural disasters contributes to growing insurance premiums and stricter terms. To improve property management and acquisition strategies, current and prospective commercial property owners should use their own view on climate risk and, to the extent possible, compare them with insurance companies’ climate forecast methodologies.

Insurance companies’ health

Insurance companies’ financial state is a key determinant of available insurance. State Farm’s (California’s largest home insurer) rationale for limiting residential insurance activities in California after the recent Los Angeles fires provides evidence. 

On February 26, 2025, the state of California’s Insurance Commissioner and the CEO of State Farm met to discuss state approval of State Farm’s desired double digit immediate rate hike. If approved, the CEO indicated that State Farm could renew policies but could not begin writing new policies, something which they hadn’t done since May 2023. Without that level of rate increase, it was possible that there would be “significant non-renewals.” The CEO attributed the limitations to the following issues:

• Inflation had driven up the cost of construction and therefore insurance claims

• Increased litigation costs

• Increased purchase of reinsurance

Many factors contribute to the above issues, such as climate change, while other factors such as competition, investments, and debt may have their own impacts. Current and prospective commercial property owners who track drivers of insurance company financial health can better assess the evolution of insurance costs and have ammunition to make strategic decisions.

Insurance company risk assessment methodologies

Many insurance companies have incorporated advanced risk modelling, including about climate risk, into their underwriting processes, often with the help of third party companies. AI is often part of such modelling, bringing refined understanding of property-specific severe weather risk, mitigation efforts, and vulnerability of critical building infrastructure (e.g. roofs):

• Companies like Zesty are using AI to enhance insights of property risk and facilitate better underwriting and pricing.

• Companies like CoreLogic and First Street use risk analytics to rate a property’s wildfire risk independent of its location relative to government-established hazard zones.

Owners who do timely renovations such as roof upgrades, incorporation of fire-resistant materials into the structure, and modernisation of electrical systems, can create buildings that insurance companies’ AI models look upon favourably, resulting in more appealing insurance policies.

Structure of insurance policies

Unorthodox insurance products can reduce insurance costs and increase the valuation of a property. Sophisticated climate risk assessments can play a key role in the structuring of these products, some of which are:

• Higher or aggregate deductibles (i.e. single deductible to all claims)

• Self-insurance where owners assume a portion of the risk

• Parametric insurance that offers faster payouts by using event parameters, like fire intensity or wind speed, to determine payouts rather than more cumbersome and costly building damage assessments. Some such products can factor resilience measures, such as sea walls and concrete home construction, into the structuring of the policy, however some insurers have yet to reflect the impact of these efforts in policies. 

• Policies that protect owners from payments regarding dysfunctional climate-mitigating technologies like solar panels

Because of the impact of such products on present and long-term property valuations, owners should evaluate the breadth and speed of adoption of these products, the quality of the underlying methodologies, and the impact on cost.

Infrastructure

Mismanagement of infrastructure can have destructive impacts on the built environment and change insurance company behaviour. Electric line ignition of three recent large fires in California illustrate the risks and consequences:

• The 2019 Kincade Fire, which destroyed approximately 370 structures, was ignited when a transmission line that had been idled in 2001 yet remained connected to the grid snapped in strong winds, shooting sparks onto the dry hillside below.

• The 2021 Dixie Fire that destroyed approximately 1,300 structures was ignited by a tree falling on an electrical distribution line.

• The 2025 Eaton Fire that destroyed approximately 9,000 structures was ignited by a transmission line that had been idled in 1971 yet was re-energised by a magnetic field from a nearby transmission line that was experiencing a power surge. 

More frequent and extreme climatological conditions (i.e. high winds and temperatures as well as low levels of precipitation) likely played a role in the ignitions and the spread of fire. According to a recent report, climate change made the Eaton fire 35 percent more likely. Yet, if the owners and supervising government entities of active and inactive electrical lines had better administered them, perhaps the fires would not have ignited.  

To the extent that they can, current and prospective commercial property owners should conduct diligence on the conditions and management of infrastructure that can cause and contribute to natural disasters. As is evidenced by recent events in the Los Angeles area, such infrastructure can influence future insurance rates and terms.

Governments

Some existing laws, regulations, and government incentives provide foundation for reduced insurance costs:

• Changed building codes that permit and/or require resilient designs   

• Faster building permit processes   

• Low-cost, long-term financing of commercial building water and energy efficiency, renewable energy, and natural disaster resilience efforts according to the Commercial Property Assessed Clean Energy (C-PACE) rules that have been enabled by state legislation in 40 states plus Washington, D.C).

Other existing laws and regulations stymie insurance cost reductions and property valuation increases : 

• Some regulators are slow to permit insurance premium increases, leading to insurance company exits from markets

• Some regulators have not allowed insurance companies to calculate insurance premiums using forward-looking climate change data while other regulators, like in California, are now permitting such use. When the use of such data is not permitted, insurance companies have trouble accurately pricing premiums and may shift to higher-priced excess and surplus (E&S) markets or exit. 

• Many state governments have established residual insurance plans that can provide coverage to owners who do not tap private insurance markets. However, out of 36 residual insurance plans that offer coverage for natural catastrophes, 21 don’t detail how deficits would be paid, leaving owners without clear paths to recovery.

Current and prospective commercial property owners should monitor where policies have changed, determine how they are affected, and take relevant actions. For example, using C-PACE on a building in an area where building codes have favourably changed could reduce insurance costs.  

Elected governments can change laws, regulations, disclosures, building codes and building permits. By monitoring the agendas of various stakeholders, impending potential technological changes, and natural disaster risk, current and prospective commercial property owners can evaluate the actions that could be taken by current or future elected governments.

Residential owners

Home insurance availability and terms are changing, with owners in negatively affected areas selling at a faster rate than previously was the case. Because these trends have negative implications on commercial real estate valuations, current and prospective commercial property owners should monitor residential property insurance trends in areas that are adjacent to their properties.

Lenders

Commercial real estate property lenders are integrating climate risk into their underwriting, some in more conservative ways than others. Traditional lenders tend to require insurance coverage above and beyond the risk exposure that is calculated by insurance companies. Such policies can provide better outcomes for property owners if there were a catastrophic event, but at a significantly higher cost than was previously the case.

Property owners and investors should assess the terms provided by alternative lenders, potential future changes in insurance requirements by all types of lenders, and the possibility and implications of not using debt.

Protecting against natural disasters using technology

New technology creates opportunities for property owners to prevent or minimise the effects of natural disasters. Insurance companies may take such effects into account when underwriting policies. By evaluating how insurance companies may view such technology, current and prospective commercial property owners can better map out property strategies. 

One example of such technology are AI bots that serve as digital fire-lookouts for wildfires. The ALERTCalifornia began adding these types of AI bots to their network in 2023 since which time they have detected approximately 1,200 fires and beat human 911 callers approximately one-third of the time.

Conclusion

While many may attribute the majority of commercial property real estate insurance premium increases and term tightening to a greater scale and frequency of natural disasters, many other factors are driving the trend. Current and prospective commercial property owners who can identify and understand the totality of factors behind present and future insurance company decisions will be better positioned to make value-creating decisions about their investments.

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