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Business Insurance Implications of a Challenging Market

By May 24, 2023No Comments

Property and casualty insurance lines are experiencing a hard market, which is making it difficult for businesses to secure the commercial insurance they need. This can lead to frustration when applying for new coverage or renewing an existing policy. Here’s what business owners need to know.

What Does a “Hard Market” Mean in Insurance?

Similar to the economy, the insurance market goes through cycles known as hard and soft markets.

According to IRMI, a hard market refers to an upswing in the insurance market cycle when premiums increase, coverage terms become more restricted, and capacity for most types of insurance decreases.

In other words, your premiums will likely increase during a hard market. You may also find that your coverage terms are less favorable than you would like. For example, your deductible may be larger, and your policy may have more exclusions. It’s even possible your insurance company will decline to renew your policy.

Three Traits of a Hard Market

  • Higher Premiums
  • More Underwriting Restrictions
  • Less Coverage Capacity

What Causes a Hard Market?

Multiple factors can trigger a hard insurance market. According to IRMI, common causes include falling investment returns, an increase in the frequency or severity of losses, and regulatory action that is unfavorable to insurers. Frequency and severity of losses is the biggest factor at play right now.

Certain loss types have become much more common:

  • Cyberattacks have surged in recent years. The IC3 recorded losses related to cyber complaints of $10.3 billion in 2022, up from $6.9 billion in 2021.
  • Motor vehicle fatalities have increased. The NHTSA says traffic fatalities increased by 10.5% in 2021 compared to 2020.
  • Natural disaster losses are rising. NOAA says 18 separate weather and climate events caused losses in excess of $1 billion in 2022. Hurricane Ian was especially costly, but wildfires, tornadoes, and severe storms have also caused losses.

Claims are becoming much more costly:

  • Inflation is making claims more expensive. Repairing and replacing property costs considerably more than it did just a year ago due to high inflation rates, which impacts overall claims costs.
  • Supply chain issues also increase expenses. When the materials and parts needed for repairs aren’t readily available, claims can take longer, which can increase overall costs.
  • Litigation costs are rising. According to Swiss Re, third-party litigation funding is making lawsuits more expensive – a trend known as social inflation.

What Does a Hard Market Mean for Business Owners?

When insurers haven’t collected enough premium to cover the losses they’ve had to pay, they need to raise rates and restrict the amount of coverage they extend. During this time, known as a hard market, it’s more challenging to find affordable, comprehensive coverage for your business. Below are some tips to keep in mind.

  • You may have to pay more for insurance. If your business is considered high risk for any reason (for example, due to your industry, location, or previous claims), rate hikes may be even steeper.
  • Insurance may take more time. In a hard market, finding suitable coverage can take longer, meaning you should start the process early. You’ll also need to spend time making sure your insurance applications are as strong as possible.
  • Communication is key. Your broker can help you prepare, but only if you’re willing to work together. Good communication is essential to avoiding unwelcome surprises.
  • Determine how you can reduce your risks. A poor loss history is especially damaging right now. Make sure you can demonstrate the steps you’re taking to control your risks. For example, cyber insurers will want to know about your cybersecurity policies.
  • Work with an industry specialist. At the very least, work with an insurance partner that specializes in business insurance. If possible, also look for a partner that specializes in your industry niche – such as construction or manufacturing. They may have access to more options and solutions for your industry.
  • Play the long game. Managing risk is like steering a ship. Sharp turns are impossible because insurers look at a minimum of three years of loss history. If you make big risk management improvements now, you may not see lower premiums for three years, but over time, your efforts will pay off.

A Watkins Insurance Group advisor can help you strengthen your submissions to increase the odds of success. We can also help you explore other insurance strategies that may be helpful during a hard market. Contact us to learn more.