When commercial property owners receive their insurance renewal policies this year they may be in for an unexpected and very pleasant surprise.

Following years of increases in the cost of property and liability insurance, many classes of businesses may begin to see reductions of 10 to 15 percent in property premiums over the next year because of increasing profits by the insurance companies and their reinsurers.

Coming down from several years of higher premiums, property owners can expect this leveling of rates to stabilize the market for the near future. The pricing correction follows years of instability in the market.

Prior to Sept. 11 the insurance situation was challenging. Multifamily underwriters had experienced losses on claims along with declining returns on investments for several years, resulting in large numbers of these companies leaving the market entirely. Fewer carriers and heightened losses meant remaining carriers were increasing rates and deductibles while reducing coverage.

Then Sept. 11 happened and prices skyrocketed. The industry saw property and liability insurance costs increasing by 50 to 100 percent or more in some instances upon renewal. As the insurance industry was faced with an inability to spread the risk of terrorist attacks through the worldwide reinsurance network, domestic insurers looked to the federal government to fill the void left by the reinsurers or contract language that would exclude injury and damage caused by acts of terrorism.

This impact on the insurance industry after Sept. 11 had far reaching consequences since this tragic event represents the largest single insured event in history. Estimates of total covered losses go well-beyond paying for the damage to the buildings – property, general, aviation liability, workers compensation and life – range from $30 billion to as much as $70 billion.

The overall commercial insurance market experienced continual price increases since 2000, which was precipitated by a massive decrease in insurance surplus from 2000 to 2001. Now, as supply catches up to the demand and without a catastrophic event or high profile scandal, the market has balanced out lending to flattened or decreased premiums.

The resurgence of the stock market also plays a significant role in the premiums charged to businesses. Insurance companies have been able to bounce back in the last few years with higher premiums and because there have been fewer disasters, the results have been record profits. As a result, commercial insurance loss ratios have dropped sharply in the last year.

This easing of insurance prices also signals the coming end of the hard insurance market cycle. In the past, the hard market has run roughly two years before softening. But industry experts wonder if the industry will be able to take a protracted hit on prices given the current economic climate. Indicators such as interest rate levels and stock market valuations affect the cash position of the major insurance companies and the prices they command in the marketplace.

Proper maintenance of electrical wiring, stairways, carpeting, flooring, elevators, escalators, parking areas and adequate lighting are all factors taken into consideration by the underwriters. The installation of a sprinkler system, smoke and fire alarms, and adequate security devices are also important factors that could affect pricing.

For some property owners it may make sense to raise policy deductibles where appropriate to lower the premiums. How high to raise the deductible should be governed by how much the property owner can afford to pay out of pocket, keeping in mind not to raise it so high that the business cannot cover it should a loss occur. If your portfolio is large enough, you may wish to consider assuming more of the risk and look into a self-insured retention plan.