Sticker shock and revolving risk are the new normal.
Extreme weather, cyberattacks, supply chain interruptions, worker shortages, wars and inflation keep hammering the insurance market. It’s like the classic “I Love Lucy” scene where Lucy works on an assembly line in a candy factory. As the conveyor belt speeds up, she starts cramming candies into her mouth to keep the line moving. Insurance companies are in a similar predicament. They’re trying to keep up with the frantic pace of catastrophic losses resulting in billions in damages.
The aftermath is a hard market. A hard market is when insurers tighten their underwriting standards and increase premiums due to high claim payouts and low profitability.
What does a hard market mean for your business? Part of it depends on what your business does, how risky your operations are and the likelihood you’ll have a claim. The other part is how many insurance companies will take on your business risk and for how much.
Events shape the cost of insurance premiums
For several years, claim payouts have exceeded what insurers have earned. An insurance company’s earnings and investments affect its solvency and credit rating. As finances tighten, insurance companies scrutinize their portfolios for clients at risk for high-loss claims.
In some cases, they respond by raising policy premiums to make up for dwindling savings. In others, they exit markets completely and decline to renew clients.
A hard market means competition and high prices
The insurance industry is experiencing high-value and high-volume claims, from extreme property damage to liability lawsuits to cyberattacks. Insurance companies are fielding lawsuits on all sides, either defending their clients or protecting themselves from clients suing them.
While the courts are busy interpreting the meaning of insurance policies, the insurance companies are refining their policy language and exclusions to limit the risk they’re willing to absorb.
As a business owner, insurance probably feels overwhelming, even without the high price tags. But it helps to get professional advice for your business insurance plan.
Insurance isn’t for covering every mishap; it’s for your worst-case scenario. The difference between a good safety net and a bad one is a plan that suits you. The right insurance plan can be the difference between resiliency and bankruptcy.
Extreme weather
Hurricanes, floods and wildfires are examples of extreme weather. Extreme weather is a severe meteorological phenomenon with the potential to cause widespread destruction. Extreme weather has been increasing in intensity and frequency. Insurance companies don’t have time to recoup their losses in between events.
For example, let’s say your retail store is damaged in a tornado. Everyone in town is competing for construction teams, and price wars begin. Your insurance pays for the primary structural repairs. Your business interruption insurance kicks in 72 hours after your damage claim. You’re covered for income replacement to cover payroll and loans while you await repairs. Without insurance, these things could have shuttered your business.
Extreme weather disrupts business structures and operations. Damages lead to restoration costs, operational downtime, lawsuits and business income loss. All of these factors drive up insurance claims, pushing premiums higher.
Inflation
When inflation rises, so do insurance premiums. The more it costs to repair or replace something, the more insurance companies have to collect for their reserves. The same goes for the cost of responding to injuries, liabilities and data exposures.
Social inflation’s effect on the insurance market
Social inflation is on the lips of many agents (and lawyers) because it’s a driving factor in increased insurance costs.
Social inflation refers to the rising cost of litigation, a widening lens on liability and jury verdicts resulting in higher awards. For example, some lawsuits have fetched jury verdicts of over $10 million. These “nuclear verdicts” have only exacerbated the hardening market. More plaintiffs are going to trial or countering rather than accepting initial insurance settlement offers.
In the case of insurance, paying it forward means passing higher costs to the consumer.
Supply chains also affect the market
Global supply chains are significant business detractors. Shipping container shortages, international gridlocks, accidents, wars, cyberattacks and tariffs have created ripples in the supply chain and the insurance industry. Knowing your supply chain and planning for alternatives can go a long way toward prevention.
New technology can create both solutions and liabilities
Businesses with robust cybersecurity programs can qualify for discounts on cyber liability insurance. You might need to increase your cybersecurity to land better rates.
However, artificial intelligence (AI) could lead to another cyber liability price hike while insurance companies grapple with insured losses associated with AI tools. As AI integrates into workflows across industries, professional and cyber liability increases. AI tools can analyze vast amounts of data to predict future trends and risks. AI chatbots and 24/7 support help with the processes.
On the contrary, AI raises privacy and cybersecurity concerns. AI tools are only as good as their training data and intended use. Biased, inaccurate or incomplete data can lead to misguided decisions. AI can strengthen cybersecurity defenses. It can also turn a lone cyberattacker into a dangerous threat.
Unchecked use of AI tools may lead to more lawsuits, regulatory penalties, injury, and property and reputational damage if incorrectly handled. Ethical training, operation and cybersecurity are vital to AI tool integration.
What types of insurance are affected?
According to Risk & Insurance magazine, the main types of insurance that remain firmly in a hard market are:
Commercial auto covers vehicles you use for business. Inexperienced drivers and driver shortages contribute to increased accidents. Nuclear verdicts and the cost of repairing vehicles are other major issues. Security features, regular maintenance and employee safety training can help prevent accidents. Ask about discounts for telematics, safe driving, secure parking and antitheft systems. A higher deductible can also lower your overall premiums.
Commercial property protects your building and business personal property. Catastrophic weather has decimated some areas. To lower your rates, maintain your property. Install security and fire mitigation systems. Check with your agent about the discounts available to you. Choose a higher deductible.
Ask your agent to review your business risk exposure. If you’re worried about insurance costs, your agent can help you with a plan to reduce your property or auto liability exposures.
Traditional market alternatives and supplements
Excess and surplus insurance
Once a last resort for covering emerging risks, excess and surplus (E&S) insurance companies are becoming more mainstream.
Traditional insurance companies are “admitted carriers,” meaning they are subject to strict state regulations and oversight. They have less wiggle room in pricing, but the state financially backs their policies if they go bankrupt. If payouts from a catastrophic event bankrupt a traditional insurer, the state will step in and pay the remaining claims. Not so with E&S.
E&S insurance carriers are “non-admitted,” meaning they’re not subject to the same regulations as traditional insurers. But they don’t have financial backing if they go bankrupt. This flexibility allows E&S to cover businesses with unique, high-risk needs that standard carriers won’t. They set their prices, which allows them to take on riskier clients and industries.
The rise in E&S coverage reflects increasing risk in the business landscape. E&S can solve uninsurability problems for industries like construction and manufacturing, or locations prone to disasters like wildfires or hurricanes.
Parametric insurance
Parametric insurance is a type of insurance that bases payouts on defined parameters or triggers rather than actual losses incurred. It removes the need for an insurance adjuster and inspection process since the policy is based on data triggers, not property loss triggers. You’ll need to agree on a data source and payout terms. Ask your independent agent and lawyer to review the contract.
Parametric insurance can help you with a cash infusion when you need it.
For example, say you own a transportation company that delivers products for the last leg, or “last mile delivery,” of consumer shipping. You have snow and rainy seasons, leaving you at risk for blizzards and flash floods. You have commercial auto insurance for liability and catastrophic damage. You also buy a parametric policy using the National Weather Service (NWS) as your data index. You choose parameters for snowfall and rainfall per hour.
Three months after you buy your parametric policy, a blizzard dumps a foot of snow. Your trucks can’t move and you fall behind in your delivery schedule. The snowfall exceeds the limit in your policy, so the NWS data triggers a payout. You use the cash to reimburse yourself for paying a private company to remove the snow so you can get your trucks moving. You also use it to pay overtime to catch up on your delivery schedule.
Parametric insurance doesn’t cover losses or gaps like a traditional policy. But it can be a strategic supplement to your risk management program.
We’re your secret weapon in a hard market
Independent agents serve your best interests, not the insurance company’s. Going it alone or rolling the dice on a do-it-yourself policy won’t get you a personalized approach. The cheapest policy is tempting but can have more exclusions and limitations. What’s the point in insurance that isn’t right for your liability exposures?
Even in a hard market, we’ll search for insurance that fits your needs and budget.
We know which insurance companies are poised to take on your industry’s risk and which aren’t worth trying.
We’re not tied to one company, either. Most businesses have more than one insurance carrier for different risks. Some insurance companies offer competitive pricing on commercial auto rates but not commercial property. We’ll present you with multiple quotes, mixing and matching the companies based on coverage and cost.
We can assist with an imperfect claims history
If you’ve got a few dings on your record, you might need to pay more for coverage or go with a lower-rated carrier. But we’ll still market your business to make it appealing to insurance companies. For example, say you have a history of injury claims but enacted a successful employee safety training program in response. We’ll present your training data to an underwriter to show you’ve had claims but you’re trying to improve. Training shows you’re trying to reduce your risk, which is attractive to insurance companies.
We’ll take the time to assess your risk and shop around to get the most options.
Review your policy prior to renewal
Review your policy, give us a call and we’ll discuss balancing what you can afford to pay out of pocket (self-insure) against the catastrophic risks that could destroy your budget. Higher deductibles for increased coverage is one of many options we’ll walk you through. Beyond the pricing, we’ll review our agency value-adds, like risk management solutions, so you know you’re getting the support you need.
