What Affects the Cost of Insurance on Commercial Buildings?

Are you a busy business leader curious about potential new insurance costs or puzzled by a recent surge in insurance premiums for a new build? Understanding these costs is crucial for keeping your budget on track and avoiding compliance issues. 

At XL Structural, we recognise the challenges of managing budget constraints and meeting regulatory requirements to ensure your buildings are both compliant and cost-effective. 

In this article, we’ll explore the key factors influencing the cost of insurance for commercial and industrial buildings. We'll address common concerns and provide valuable insights to help you make informed decisions and effectively manage your insurance expenses. 

Building Location 

The location of your building plays a significant role in determining your insurance costs. Insurers evaluate the risk associated with the geographical area where the building is situated. Factors such as crime rates, natural disaster risks (like earthquakes, floods, and storms), and proximity to fire stations and hydrants are considered. Buildings in high-risk areas tend to have higher insurance premiums. Conversely, buildings in areas with lower risk profiles may benefit from reduced premiums. For example, Christchurch's earthquake-prone regions typically see higher premiums due to increased risk, whereas buildings in Auckland might have lower premiums due to a relatively lower seismic risk. 

Climate Change Impact 

It is impossible to ignore the impact of climate change on insurance costs. The frequency and severity of severe weather events are increasing globally, leading to higher premiums as insurers seek sustainable pricing models. In New Zealand, flooding has been the most common weather event, accounting for over 90% of losses from natural disaster claims since January 2021. The New Zealand Government's National Adaption Plan, published in April 2022, outlines actions to address climate-related risks, reflecting the growing need for buildings to be resilient against such events.  

Building Construction and Materials 

The construction type and materials used in your building can greatly influence your insurance costs. Buildings constructed with fire-resistant materials, such as concrete or steel, generally attract lower insurance premiums compared to those made with wood or other combustible materials. Fire-resistant buildings are less likely to suffer extensive damage in a fire. Additionally, modern construction techniques and materials that enhance structural integrity and resilience to natural disasters can also result in lower premiums. In high seismic risk areas, the use of materials such as Expanded Polystyrene Panel (EPS) and Aluminium Composite Panel (ACP) requires robust risk management procedures, and insurers may limit coverage or increase premiums based on these factors. 

Building Size and Usage 

The size of your building and its intended use are also crucial factors. Larger buildings typically have higher insurance costs because they represent a greater risk to insurers in terms of potential loss. Similarly, the usage of the building impacts insurance premiums. For example, a warehouse storing flammable materials will have higher insurance costs compared to one storing non-flammable material. It's essential to accurately communicate the purpose of your building to your insurer to ensure appropriate coverage and cost estimation. 

Safety and Security Measures 

Investing in safety and security measures can significantly reduce your insurance premiums. Insurers favour buildings equipped with robust security systems, fire alarms, sprinkler systems, and other safety features. These measures lower the risk of damage and loss, making your building a safer bet for insurers. Installing surveillance cameras, security lighting, and access control systems can further enhance security and potentially lower insurance costs. In New Zealand, adhering to the Building Code’s safety requirements, which were updated in 2023 to include more stringent fire safety measures, can also be beneficial. 

Building Age and Condition 

Older buildings often have higher insurance costs due to their increased risk of structural issues, outdated electrical systems, and plumbing problems. Insurers may require a thorough inspection of older buildings to assess their condition before providing coverage. If the building is well-maintained and has undergone recent renovations or upgrades, it can help in securing lower premiums. Regular maintenance and timely repairs are crucial in keeping insurance costs in check for older buildings. For instance, buildings in Christchurch that have been retrofitted to meet earthquake safety standards often benefit from lower insurance premiums. 

Claims History 

Your claims history as a business owner can impact the cost of insurance for your commercial or industrial building. If you have a history of frequent claims, insurers may view you as a higher risk, leading to higher premiums. On the other hand, a clean claims history can work in your favour, potentially resulting in lower insurance costs. It's advisable to implement risk management practices to minimize incidents and claims, thereby supporting a favourable claims history. This is especially relevant in New Zealand where the Earthquake Commission (EQC) plays a significant role in claims related to natural disasters. 

Coverage and Policy Type 

The type and amount of coverage you choose for your building will directly affect your insurance costs. Comprehensive policies that offer extensive coverage, including protection against a wide range of risks, will naturally be more expensive than basic policies with limited coverage. It's essential to strike a balance between adequate coverage and affordability. Discuss your specific needs with your insurer to tailor a policy that provides the necessary protection without overburdening your budget. The Insurance Council of New Zealand (ICNZ) provides guidelines on understanding policy terms and coverage options. 

Under-Insurance Risks 

The COVID-19 pandemic has underscored the risks of under-insurance. High inflation, supply chain disruptions, and extended building costs have all contributed to increased claims costs. Ensuring your building's sum insured reflects current building costs is critical to avoid under-insurance, especially for specialised equipment and machinery that may have longer replacement times and higher costs. Recent data from the Reserve Bank of New Zealand shows an increase in construction costs by approximately 8% over the past year, highlighting the importance of regularly updating your insurance coverage to reflect these changes. 

Regulatory Compliance 

Compliance with local building codes and regulations can influence your insurance costs. Buildings that adhere to the latest safety and construction standards are generally viewed more favourably by insurers. Non-compliance or failure to meet regulatory requirements can result in higher premiums or even difficulty in obtaining insurance coverage. Ensuring that your building meets all necessary regulations not only promotes safety but also helps in managing insurance costs. The upcoming Financial Markets (Conduct of Institutions) Amendment Bill will further emphasise the need for compliance and may impact how insurance products are priced and offered. 

Deductibles 

Choosing a higher deductible can lower your insurance premiums. The deductible is the amount you agree to pay out of pocket before your insurance coverage kicks in. By opting for a higher deductible, you take on more risk, which can result in reduced premiums. However, it's important to choose a deductible that you can comfortably afford in the event of a claim. Balancing deductibles and premiums are a key consideration in managing your insurance costs effectively. 

Risk Management Practices 

Implementing effective risk management practices can have a positive impact on your insurance costs. Conduct regular risk assessments to identify potential hazards and take proactive measures to mitigate them. Employee training programs, routine safety inspections, and emergency preparedness plans are all part of a robust risk management strategy. Demonstrating to insurers that you have comprehensive risk management practices in place can lead to lower premiums and better coverage terms. 

Insurance Provider 

Finally, the choice of insurance provider can also affect your insurance costs. Different insurers have varying risk appetites, pricing models, and discount programs. It's crucial to shop around and compare quotes from multiple insurers to find the best coverage at a competitive price. Working with an experienced insurance broker can help you navigate the options and identify the most suitable insurance provider for your specific needs. 

Conclusion 

Understanding the factors that affect the cost of insurance on commercial and industrial buildings is essential for effective budget management and risk mitigation. By considering the building's location, construction, size, usage, safety measures, and more, you can make informed decisions that optimise your insurance expenses. Implementing risk management practices and maintaining compliance with regulations further enhances your ability to secure affordable and comprehensive insurance coverage. Remember, the right insurance policy is a critical component of protecting your investment and ensuring the long-term success of your business.