Amid a hard insurance market, business owners are facing new challenges with securing adequate coverage. To control costs, it’s important to reassess claims management and insurance strategies ahead of policy renewals.
The Current State of Commercial Insurance
The Council of Insurance Agents & Brokers (CIAB) says the second quarter of 2023 marked the 23rd consecutive quarter of commercial insurance premium increases. Premiums increased by an average of 8.9%, but some lines saw steeper hikes.
- Commercial property insurance premiums increased by an average of 18.3%. This was the highest rate hike of all lines.
- Commercial auto insurance premiums increased by 10.4%. Commercial auto insurance premiums have increased for 50 consecutive quarters.
- Cyber insurance premiums only increased by 3.6%. However, prices are still elevated after the double-digit rate hikes of 2021 and 2022.
In addition to premium increases, some policyholders have faced larger deductibles and stricter underwriting requirements that make it difficult to secure any coverage at all. In the CIAB report, respondents noted rising property insurance deductibles and 80% said they had seen a decrease in commercial property capacity.
The Ins and Outs of a Hard Market
Much like the economy, the insurance market has a cyclical nature. In the insurance market, cycles are influenced by insurance losses and expenses paid compared to what’s expected and the insurance industry’s overall level of profitability.
When losses and expenses are lower than expected over a period of time, soft markets tend to result. Soft markets are characterized by low premiums, high limits, flexible contracts, and readily-available coverage. During a soft market, insurers are competing against each other to underwrite insurance, which means business owners have a relatively easy time securing broad coverage terms at affordable prices.
When insurers pay more than expected for losses and other expenses over a period of time, the market hardens. In hard markets, premiums are more expensive, limits are lower, terms are more restrictive, and underwriting is stricter. Insurers may be unwilling to cover certain risks, and business owners have a more difficult time securing coverage.
Although some lines are faring better than others right now, commercial property insurance shows clear signs of a hard market: surging rates and reduced capacity. According to Insurance Journal, reinsurance rates, inflation, valuation adjustments, rising claims costs, and mounting weather-related losses have all contributed to the hard market, which is likely to persist for the foreseeable future.
Assessing Your Business’s Specific Insurance Needs
A lot has changed in the world over the past few years. In many areas, property values have skyrocketed. Thanks to supply chain interruptions, labor shortages and inflation, the cost of building supplies and labor has escalated. All these factors affect how much insurance your business needs. As you approach your renewal, keep the following tips in mind:
- Review and adjust your policy limits. Although it’s increasingly difficult to obtain affordable commercial property insurance, businesses still need to protect their assets. Verify that your limits are sufficient to cover the value of your property and other exposures, such as business interruption. Look for coverage gaps and exclusions.
- Secure coverage for your cyber risks. Wired says ransomware attacks surged in 2023, after dropping in 2022. Cyber premiums have moderated, but given the recent increase in attacks, rates may start to rise again soon.
- Identify your industry-specific coverage needs. Your exposures will vary depending on the nature of your business. For example, data from Lex Machina shows that product liability case filings have increased in recent years despite a brief drop in 2021. Companies with product liability exposures may want to consider additional coverage in light of this trend. In addition, the Insurance Information Institute says auto insurance claim payouts have increased due to social inflation. Talk to your insurance advisor to identify trends in your industry that may affect your risk management stance.
How Business Owners Can Manage Insurance Costs
As insurance premiums rise, business owners can take steps to control their total cost of risk. Here are some ideas:
- Invest in your property. Upgrades to your property may reduce the risk of damage and control your claim costs. Updates may also help you position your company as a more attractive risk for underwriters, helping you secure affordable coverage. Work with your insurance advisor to identify the greatest threats (such as flood, wind, or wildfire) and the upgrades that could mitigate your exposures.
- Provide cybersecurity training. People are often the weakest link in cyberattack preparedness. Many cyberattacks begin with phishing or other social engineering schemes that exploit human weaknesses. Be vigilant in regularly educating your team and monitoring their cyber awareness. The FTC has information on how to prevent a phishing attack. Your insurance carrier may also provide resources.
- Develop strong disaster response plans. Think about how you would manage a ransomware attack, the destruction of your facilities, major supply chain interruptions and other significant threats and create plans to respond and recover. See the S. Small Business Administration, Ready.gov, and the U.S. Chamber of Commerce for resources.
- Prioritize safety. By fostering a culture of safety, you can reduce injuries, property damage, and business interruption.
- Commit to documentation. If someone files a lawsuit against your company, good documentation can help your defense. Assess your documentation procedures and take steps to improve them.
Exploring Coverage Options
When reviewing coverage, don’t just focus on the premium. Although the premium is an immediate cost, you may face much greater out-of-pocket costs due to coverage exclusions if you have a claim.
Consider alternative insurance strategies. For example, you could take on more risk with a larger deductible or self-insured retention. You could also consider captive and self-insurance options or buy a parametric insurance policy.
This is a challenging insurance market for business owners, but an insurance professional can guide you through the application process and help you understand your options. Look for an insurance broker with experience in your industry and begin working together as early as possible.
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