If you consider purchasing a property in a high-risk area, you may wonder how the natural disaster history/risk can impact your premium. This article breaks down how risk is assessed and how natural disasters impact underwriting.
Commercial property insurance involves a process called underwriting, which examines aspects of your property, including its location and condition, and creates a risk profile that impacts the type of premium you pay and cover you should get. Different types of properties face different risks when measured against these factors.
In this article, we’ll explore how natural disasters can influence the underwriting of commercial property insurance.
What is Underwriting?
Underwriting is the process of deciding whether to approve or deny an insurance policy or loan. It involves examining the details of what you’re applying for, assessing associated risks, and reviewing your financial situation.
Based on this information, the underwriter sets the terms and conditions or decides whether to approve your request. In simple terms, underwriting ensures that everything is in order before you get the insurance or loan.
Commercial property underwriting evaluates the risks and details related to insuring or financing a commercial property. Here’s what it typically involves:
- Assessing the Property: The underwriter examines specifics such as the property’s location, condition, and usage (e.g., office space, retail store, or warehouse).
- Evaluating Risks: They identify potential risks like fire, flooding, or vandalism for insurance, or assess the property’s income potential and market value for loans.
- Reviewing Financials: The underwriter reviews the property owner’s or business’s financial health, including credit history, past financial performance, and existing debts or claims.
- Setting Terms: Based on their assessment, they determine the terms of the insurance policy or loan, including coverage limits, premiums, interest rates, and repayment schedules.
Common Insurance Policy Types
Different Types of Commercial Property Insurance
- General Property Insurance
- Commercial Building Insurance
- Public/Products Liability Insurance
- Business Interruption Insurance
- Portable Property Insurance
ACS Financial, as a trusted advisor,r can provide you with key takeaways and general advice on
- Commercial property insurance covers loss or damage to non-residential properties, including structures, fixtures, and utilities.
- It’s essential for protecting assets against natural disasters, theft, vandalism, and accidental damage.
- Policies vary based on business type, location, and specific risks, with options like general property, building, public liability, business interruption, and portable property insurance.
- Choosing the right plan depends on business size, industry risks, and budget.
- Engaging with reputable insurance brokers can help tailor the best coverage plan for your needs.
Business package insurance often forms the foundation of commercial property protection, typically covering building damage, contents, and business interruption.
Some natural disasters may require specific-risk insurance beyond standard coverage. Additionally, public liability insurance protects against third-party claims, which often arise during natural disaster claims. You can read more about public liability insurance here.
Natural Disasters and Their Impact on Underwriting
Natural disasters occur with disconcerting regularity in Australia. All are devastating, but some become etched in our collective consciousness due to their extremity.
In the world of insurance, some catastrophes are indelibly marked on the balance sheets due to the extreme losses incurred. When the industry faces major catastrophic events, it can reverberate throughout, leading to changes that affect policies and policyholders – changes that reflect the costliest disasters and their impacts.
In Australia, several natural disasters can impact commercial properties, including:
- Bushfires: These can affect properties in both rural and urban areas. Beyond immediate fire damage, properties can face risks from ember attacks and smoke damage. Infrastructure disruption often compounds the initial impact, while heat damage to structures can create long-term issues that may not be immediately apparent.
- Floods: Water damage can lead to immediate structural weakness and electrical system damage, which often leads to longer-term issues such as foundation problems and mold growth. Insurance policies may treat flood damage differently from other types of water damage, making it crucial to understand specific coverage details.
- Cyclones and Severe Storms: Aside from the immediate wind damage, longer-term water penetration issues can lead to business interruption, which your insurance policy should cover.
Common Insurance Misconceptions
Many property owners assume all natural disasters are automatically covered under standard policies. The reality is that not all policies are equal, and knowing the inclusions and exclusions is vital.
At ACS Financial, we take special care in helping you understand what your policy covers and doesn’t cover.
5 Common Misconceptions About Commercial Insurance
“Commercial Insurance is Only for Large Corporations.”
“All Commercial Insurance Policies Are the Same.”
“Commercial Insurance is Too Expensive and Not Worth the Investment.”
“I Have a Home-based Business, So My Home Insurance Will Cover Any Business Risks.”
“Once I Have Commercial Insurance, I’m Covered for Everything.”
Property Protection Measures
Adequate property protection combines multiple strategies. Regular building inspections, maintenance, and structural reinforcement form the foundation of physical security. Equally important are modern safety systems that provide early warning and response capabilities.
Risk Management Strategies
A risk management strategy addresses risks, exposures, and events that might leave companies vulnerable. Organisations of all sizes can use this strategy to ensure teams are aligned and have precautionary measures in place. Risk management is best done in a full cycle, continuously identifying, assessing, managing, and monitoring factors.
The five types of risk management are:
- Avoidance: Through avoidance measures, business leaders work to prevent problems. However, it’s worth noting that this approach doesn’t solve the problem—it just skirts around it.
- Retention: Rather than looking at insurance options or finding an effective solution to mitigate risks, some organisations retain the risk of loss and pay for expenses out of pocket. Companies select risk retention when they decide that the price of assessing risks will be more costly than paying for damages. It is essential to remember that this approach can lead to more financial losses than anticipated.
- Spreading: Duplicating and storing records in different buildings can prevent lost documents if a fire occurs. Spreading teams across locations can also make managing potential risks easier.
- Transfer: Businesses can use the risk transfer method by purchasing insurance or acquiring protection from a third-party provider. Additionally, having multiple layers of protection can give business leaders better peace of mind.
- Loss prevention and reduction: When risks can’t be avoided, teams may reduce the loss in severity and frequency. Reduction strategies include safeguarding problems from fully derailing operations and training employees to handle project risk and response.
Risk Management Strategies
Effective risk management combines thoughtful planning with practical action.
Here are the key areas to focus on:
Assessment and Planning
- Regular professional safety audits
- Detailed property condition reports
- Emergency response procedures
- Recovery planning basics
Staff and Communication
- Emergency response training
- Clear communication chains
- Key contact lists
- Regular safety updates
Maintenance and Prevention
- Scheduled system checks
- Storm season preparation
- Emergency equipment testing
- Documentation protocols
Safety Systems
Modern properties benefit from integrated safety systems that work together to protect your investment. Advanced fire detection and water level monitoring provide early warnings of potential threats, while comprehensive emergency lighting and backup power systems ensure safety measures remain active during crises.
Cost Considerations
Develop Comprehensive Emergency Response Plans: Create detailed plans outlining procedures for various natural disasters, including evacuation routes, communication strategies, and recovery processes.
Train Employees: Ensure that all staff are trained on emergency procedures and have access to necessary resources, such as first aid kits and emergency contact information. Regular drills help maintain preparedness.
Summary Table: Impact of Natural Disasters on Commercial Property, Underwriting, and Mitigation Strategies
| Natural Disaster | Impact on Commercial Property | Impact on Underwriting | Mitigation Strategies |
| Floods | – Damage to buildings, infrastructure, and stock. – Increased risk due to climate change (more frequent heavy rainfall). | – Increased risk assessment. – Higher premiums and deductibles. – Potential need for specialised flood insurance. | – Conduct thorough risk assessments. – Implement drainage improvements. – Invest in flood barriers and other structural reinforcements. |
| Bushfires | – Devastation of properties, especially in rural areas. – Damage to structures and disruption of business operations. | – Higher premiums and stricter terms for properties in bushfire -prone areas.- Potential need for specialised bushfire insurance. | – Conduct risk assessments for bushfire vulnerabilities. – Implement fire prevention systems. – Maintain vegetation and fire lines. |
| Cyclones | – High winds, heavy rain, and storm surges cause significant damage. – Impact on coastal commercial properties. | -Increased risk evaluation for coastal areas. – Higher premiums and deductibles.- Potential need for cyclone-specific coverage. | – Reinforce building structures against wind and water damage. – Develop emergency response plans specific to cyclones. |
| Storms and Hail | – Damage to roofs, windows, and other parts of commercial properties. | – Increased premiums for properties in high-storm-risk areas. – Possible changes in coverage availability. | – Regular maintenance and inspections of roofs and windows. – Implement measures to protect property from hail damage. |
| Earthquakes | – Structural damage, especially in areas near fault lines. | – Rigorous risk assessment. – Potential need for earthquake-specific insurance. | – Invest in structural reinforcements and earthquake-resistant designs. – Regularly review and update earthquake insurance coverage. |
| Heatwaves | – Effects on properties with poor insulation or cooling systems. – Impact on infrastructure and machinery. | – Increased risk assessment for properties in heatwave-prone areas. – Possible adjustments in insurance premiums and coverage terms. | – Improve insulation and cooling systems. – Conduct regular maintenance to ensure equipment resilience. |
