By Danielle Lombardo, Chair, WTW Real Estate Hospitality and Leisure Division

Commercial real estate insurance is experiencing a period of extreme volatility, creating unprecedented challenges for the industry. During the past several years, climate-driven losses, inflation, and reinsurance costs prompted double-digit and even triple-digit premium increases. And, while the market has recently experienced some cost reductions created by greater liquidity, carriers’ appetite for risk seems to be in constant flux, making it difficult for businesses to anticipate future costs and secure long-term, stable coverage.  

Many carriers are severely limiting coverage options, particularly in the casualty space. Lender requirements for excessive coverage limits have led to significant unnecessary costs for borrowers, inhibiting new development. Unfortunately, lenders apply broad insurance mandates that fail to consider differences in location, asset type, or market conditions. Coverage availability and pricing vary significantly by region, yet banks rarely adjust requirements dynamically to reflect actual risk exposure. 

At the core of these issues is the growing litigation burden and climate-change-related catastrophes—fires, droughts, floods, hurricanes, hail, etc. This comes at a time when immigration crackdowns and tariffs are driving up construction costs, which in turn increase replacement costs and premiums.  

The liability markets are also tightening, with rate hikes and exclusions adding significant operational costs for owners and developers. This is not surprising considering that last year alone saw 10 $150M-plus “nuclear verdicts,” a sharp rise from just a few years ago when such verdicts were half as costly. The multifamily sector is particularly impacted by this liability issue, as many carriers are demanding exclusions for assault, battery, and sexual abuse claims and Freddie Mac is specifically requiring coverages that are often cost-prohibitive or unavailable.  

In short, risk management is creating significant challenges and costs for the commercial real estate industry. There are, however, solutions, including new ways to approach risk. These Alternative Risk Transfer (ART) methods are gaining traction as a way for real estate owners to hedge against market volatility and retain risk where transferring risk to an insurance company doesn’t make economic sense. ART solutions allow property owners to reduce reliance on traditional insurance, manage costs, and gain more control over risk financing. 

There are many other ways to make risk management less costly and more manageable. Greater transparency by the insurance industry would enable businesses to better navigate rate increases, allowing them to plan ahead. Many property owners are advocating for more stable, multi-year pricing models. Importantly, by using a data-based approach, lender insurance requirements can be reassessed to align with actual risk exposure rather than arbitrary limits. Sadly, current requirements often focus on checking compliance boxes rather than ensuring meaningful risk transfer. 

Along these lines, policyholders who invest in resilience measures (e.g., flood barriers, fire-resistant materials) should receive meaningful premium discounts. Use of AI and predictive analytics to streamline claims handling and improve loss predictability. 

State and federal governments are facing increasing pressure to develop backstop programs for catastrophic risks (e.g., hurricane, wildfire, flood) similar to the National Flood Insurance Program (NFIP). Some property owners are advocating for an industry-supported catastrophe reinsurance pool, modeled after TRIA (Terrorism Risk Insurance Act), to spread risk across the market. Public-private partnerships could also expand mitigation funding for resilience upgrades (e.g., grants or tax incentives for fireproofing, flood barriers, and hardening structures against extreme weather). 

Despite all the insurance-related pressures, commercial property owners and developers have options. Creative risk management strategies can help to mitigate costs and maintain adequate coverage as the public and private sectors begin to focus on larger structural solutions.