Rising US commercial property insurance costs? Learn why higher deductibles are a strategic choice for cost savings & risk management, balancing premiums & out-of-pocket exposure.

The primary challenge currently confronting U.S. commercial real estate owners is the ever-spiraling insurance premium costs. While brick-and-mortar investments have to be insured, this becomes a heavier cost day-by-day. According to a landmark study done by the Deloitte Center for Financial Services, the price of insurance for real estate investment in a commercial building more than skyrocketed in 2023; it cost an average of $2,726 per month in 2023 as compared to $1,558 in 2013 – an almost 75% rise in only 10 years! There seems to be an alarming trend that is not losing momentum. Deloitte projects that by 2030, the average monthly insurance cost will be mind-boggling at $4,890 – an 80% rise against the present level. Increased premiums have given commercial property owners a tough scenario, compounded by costs. They, ultimately, realize the art of maintaining their insurance program without compromising the essential guarantees through an increasingly popular movement: accepting much higher deductibles.

Understanding the Deductible: Your Share of the Risk

Before heading into the “why,” let us clarify the “what.” In commercial property insurance, the deductible represents the predetermined amount a policyholder shall pay out-of-pocket toward a loss covered under the policy before the insurance company considers paying anything more. In other words, the deductible stipulates the amount of money the insured has to contribute toward a claim.

• The Trade-Off: This is very important: High Deductibles = Low Premiums. In other words, the more money you agree to cover that initial loss, the less risk the insurer bears, and the lower your premium becomes. Low Deductibles = High Premiums.
• The Balance: A low deductible equates to fewer dollars going from the insured’s pocket when a claim happens, but the premiums soar really high annually. If someone chooses a deductible that’s too high, it could easily lead them to financial trouble when the time comes for them to file the claim.

An Example in Action: Let’s say your commercial building suffered considerable storm damage, costing $10,000 in repairs.

• $1,000 deductible has you paying the first $1,000, and the insurance company covers the remaining $9,000.
• $5,000 deductible has you paying the first $5,000, and the insurance company covers $5,000.
• $10,000 (or higher) deductible means the cost of damages will be borne fully by you, as it does not exceed your deductible amount.

Why Higher Deductibles Are Gaining Traction

Faced with Deloitte’s forecasted rise in premium costs, commercial property owners are doing the math and discovering good reasons to go for higher deductibles:

1.     Immediate Lower Premiums

This is the clearest and most attractive advantage. Selecting a greater deductible will provide you with substantial, quick savings on your monthly or yearly insurance cost. This releases vital cash flow that can be reinvested in the building, applied to operating expenses, or saved just for prospective deductibles. This initial assistance is quite helpful in an age of escalating expenses.

2.     Potential for Long-Term Savings

Longer-term premium savings can be achieved by compounding the cost of a higher insurance premium paid out in case of multiple claims, particularly when few or no claims are made. Owners of property with a history of substantial losses and effective risk management systems are sometimes well-placed to profit from this long-run calculation. You keep catastrophic coverage while also efficiently “self-insuring” for lesser, more foreseeable losses.

3.     Customized Risk Tolerance

Higher deductibles help homeowners to match their insurance plan more precisely with their financial capacity and level of risk. Having enough reserves, a financially strong owner may easily absorb a $25,000 or $50,000 deductible as a deliberate business decision to lower premiums, therefore lowering fixed operating expenses. This personalization lets owners exercise greater influence over their risk profile.

4.     Discourages Small Claims

Filing repeated minor claims is administratively inconvenient and, more importantly, can result in premium increases at renewal or even non-renewal. A higher deductible obviously deters owners from submitting claims for minor damages they could normally handle personally. This supports keeping a favorable claims history, which is a major consideration in obtaining reasonable prices over time.

5.     Encourages Proactive Risk Mitigation

Knowing they will bear a larger initial cost if a loss occurs provides a powerful financial incentive for property owners to invest in loss prevention. This could mean:

• Enhanced fire suppression systems.
• Upgraded roofing materials resistant to wind/hail.
• Advanced security solutions for preventing theft/vandalism.
• Comprehensive routine maintenance schedules for HVAC, plumbing, and electrical setups.

Hence, investing in mitigation not only reduces the likelihood of a claim but also potentially lowers premiums further and protects the property’s long-term value.

Types of Deductibles

Commercial property policies offer different deductible structures. Understanding these is crucial when considering an increase:

1. Flat Deductible: Most common type. It applies a deduction, which is a certain amount of money (e.g., $1,000, $5,000, $10,000, $25,000) for every covered loss event.
2. Percentage Deductible: Calculated as a certain percentage of the property’s insured value (e.g., 1%, 2%, and 5%). Usually, these are applied for hazards like windstorms, hail, or earthquakes, especially in high-risk areas. A 2% deductible on a $2 million building means $40,000 is out-of-pocket for per qualifying event.
3. Waiting-Period Deductible (Mostly for Business Interruption): Instead of being measured in dollars, it is measured in time – such as 48 or 72 hours. The business must remain shut down for this entire period following a covered loss before business interruption payments begin. This deductible period represents the initial downtime cost the owner will absorb.

The Critical Rule: Affordability First

The shift towards higher deductibles is a strategic financial decision, not a way to simply buy the cheapest policy. Choosing a $50k deductible without $50k readily available is reckless. The most important thing to consider is having the funds on hand to pay for the deductible you have selected should a loss occur.

Choosing a deductible that is not within your means is like going for insurance that is not intended for you, and you might still end up losing your business financially when you need the insurance most. Thoroughly review your income and savings before committing.

Conclusion

While falling premiums make the deductibles appealing to commercial property owners interested in aggressive cost control and greater control over the risk profile, lower premiums might present long-term savings and proactive losses in prevention. However, it does require you to be financially stable. It’s a calculated risk, not a way to simply buy the cheapest policy. The deductible must align with your ability to pay.

Facing the twin dangers of rising costs and tough deductible choices? Why not allow Gonzalez & Company to provide you with customized commercial property insurance? Starting with good core Business Owner Policies (BOPs) for property, liability, and business interruption, we build the cover tailored to the dangers facing your business-whether it is floods, equipment breakdown, or increased liability.

We’ll aid you in strategically analyzing your deductibles: saving on premiums while risking some out-of-pocket expense to arrive at a choice that is financially and psychologically comfortable for you. Contact us today for a full assessment and custom insurance plan.

FAQs

1. What’s the main benefit of having a higher deductible?

The primary benefit is immediate and substantial savings on your monthly or yearly insurance premiums.

2. What’s the most crucial factor to consider when choosing a higher deductible?

The critical rule is affordability first – you must have the funds readily available to cover the chosen deductible if a loss occurs.

3. How can Gonzalez Insurance help me with my commercial property insurance needs?

We offer tailored insurance for your business’s property, like a custom-made suit for your building. We guide you on picking the right deductible so you save money without stressing about out-of-pocket costs.