How are Commercial Property Insurance Rates Determined?

The real estate market might be booming at a time or facing a dip at others – but what remains true at all times is the inherent value in investing in this sector. Educated guesses are possible only when one has studied the market in-depth, and is versed with property appreciation. A long–term trade – real estate requires one to study intently the cash flow, rate of return, and market trends – to make profitable investments others would vie for.

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Factors that Impact Commercial property insurance

Understanding external factors that go on to decide and derive net commercial insurance value can be a complex matter to unravel. The business type, the location you function from, and the condition of the insurance industry at the moment all come together to decide the impact of the market on property insurance rates. For rating commercial property insurance, a multitude of factors come into play. But the four key characteristics as underlined by carriers continue to be the driving reason for commercial home content insurance rates and they are the following:

1. Construction of the property:
Home content insurance rates are majorly decided by the quality of material used in the construction of the commercial estate in question. Fireproof-resistant interior floors or walls cost far less to insure as compared to regular brick or stone houses. Upgrades in electrical wiring or HVAC systems – especially in new constructions help the investor insure for less.

2. Occupancy of the property:

The more the risk associated with the occupation for which the property gets used – the higher the property insurance rates. It is less to insure a florist than a restaurant, a mom-n-pop’s compared to an auto repair shop. Premiums of an estate also increase if they happen to share premises with a high-risk business.

3. Protection:

Carriers consider the above 4 factors while coming up with their insurance rate, aided by property inspection. The home insurance premiums get decided by multiplying the value of building and content with risk correlation. High-risk properties will tend to have high property insurance rates while low-risk properties usually cost investors far less to insure.

The two types of protection taken into account include Public Protection offered by the local fire departments or Private Protection offered by the fire protection methods as opted for by the policyholder.

4. Exposure:

Neighborhoods with higher crime rates or prone to property loss from vandalism are going to raise the price of the insurance premium and the cost of the insurer too. It can also happen if surrounding areas be prone to natural disasters or man-made accidents. Businesses located near a fireworks factory can be sure to attract higher property insurance rates.

How is the Commercial Property Rate Calculated?

The three methods to appraise a commercial property that one ought to consider while making an informed decision about your next investment are as follows

  • The Income Approach: This approach uses the capitalization rate or cap rate to establish property income. The net operating income of the property when divided by the current sales price of the property gives one its Capitalization Rate.
  • The Replacement Cost Approach: A much more complicated route to value commercial real estate properties – the Replacement Cost Approach will consider the land value on which the estate stands as of now. The cost of building the same estate is then factored in and added to the land value. The final property value number emerges as the depreciated value is finally considered.
  • The Market Value Approach: Considered to be the simplest method while calculating commercial real estate property value – the Market Value Approach uses a comparative method to weigh the property in question to properties of similar use and size in the surrounding area – currently put up for sale or already sold. This comparison helps determine the range within which the property in question gets placed. The number van gets adjusted with trends emerging in market research, along with dates of sale of the other properties, their age, size of land, land to building ratio, tax policies of the locality, etc.

The client thus pays what they are willing to within an open, fair, and competitive market. One can often get swayed with the personal value attached to the property or the utility it serves. The Market Value approach thus springs a number of buyers and sellers can start their negotiation from. This one is also widely known as the Sales Comparison Approach or the Comparable approach.


Commercial Property Insurance is but a volatile market wherein a considerable number of factors act as players while deciding the best insurance pricing of real estate. The above insights help you manage your risks and make better investment decisions.

Written By: PolicyBazaar - Updated: 08 February 2022
Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.