Changes in Commercial Property Insurance

It's been a difficult year for many business owners, especially those who were impacted by the Auckland Anniversary weekend flooding and Cyclone Gabrielle. The damage caused to commercial premises, vehicles, stock, and equipment has been significant.

It's clear that as the frequency and severity of extreme weather events intensifies, climate change is becoming one of the biggest challenges facing the commercial insurance industry. So, what does this mean for your insurance premiums?

As a result of large weather peril losses, you can expect to see an increase in your insurance premiums at your next policy renewal. This includes business interruption and material damage policies.

The price you pay for insurance must accurately reflect what it costs insurance providers to provide coverage. Following these latest catastrophes, insurers are being significantly impacted by the sheer volume of claims and will consider both what has been seen to date from weather event claims, and what is forecasted for the future. Higher insurance premiums may be more of an issue for properties located in flood-prone risk areas.

It's important to review your insurance policy regularly (at least annually) to ensure you have the right cover in place. This can help your business recover and minimise potential losses if you experience an unexpected event, such as a storm or flooding.

Rising construction costs are being seen across the industry. The value of non-residential building activity (including factories and industrial buildings) increased by 20% in the year preceding December 2022, according to Statistics New Zealand. *

So, how will this impact your insurance premiums?

• When a valuer assesses and values your commercial property, they consider the current rebuild value and building costs in the event of damage or destruction. So, with the increase in construction costs, your property's rebuild valuation will also increase, which could also lead to an increase in your insurance premiums.

• Rising construction costs might also mean that the insurance provider may ask for more regular valuations (typically annually or every two years).

It's clear that the current high inflation is having a significant impact on business owners, and data from Statistics New Zealand continues to paint a concerning picture. Annual inflation in New Zealand remained at a high of 6.7% in the March 2023 quarter, with food and housing being the biggest contributors. **

With inflation remaining high, it's likely that the cost of repairing or replacing property, equipment, stock and machinery will increase as well. This means that your insurance premiums are likely to increase too in order to reflect the higher replacement costs.

It's important to keep this in mind when reviewing your insurance policy and remember that the impact of inflation will vary depending on your circumstances.

• Regularly check that your sum insured is up to date (at least annually) to ensure you have the right coverage.

• Remember that the sum insured represents the maximum amount that your insurance provider will pay if your property is damaged or destroyed by an insurable event, like a natural disaster, flood or fire.

• The sum should be set at what it would cost to rebuild your property, not the market value.

• When selecting insurance coverage, remember that the indemnity period represents the maximum length of time that your insurance provider can cover your fixed expenses and insurable gross profit while your business operations are temporarily halted due to an insurable event.

• The indemnity period is usually between 12 and 36 months.

• Choose the right indemnity period to ensure your business has sufficient time to make property repairs and return to pre-loss trading levels.