A trend started in 2017 that has impacted every business. That year the insurance market quickly started to harden. The result was double-digit rate increases across nearly every insurance line. Projections show no signs of insurance costs going down anytime soon. If your business recently went through an annual renewal, you likely felt the pain of having to pay more for commercial insurance premiums—significantly more. Your business is not alone. Despite rates going up for everyone, there are strategies to make the best of a bad situation. Understanding the market, knowing what insurers look for, and proactively managing your company’s risk will give you a better negotiating position in your next renewal.
Why Are Insurance Rates Increasing?
For the last several years, most insurance lines, excluding workers’ compensation, have been unprofitable. That is because the frequency of claims and their price tag keeps going up. Insurers are facing an unprecedented number of damage claims related to natural disasters. Hurricane Ida from the summer of 2021 is expected to produce up to $30 billion in claims. Cyberattacks also are becoming more common and expensive. The pandemic produced a spike in insurance claims that we may not know the full cost of for years.
Another factor impacting rates is litigation. Jury awards are trending upward in both amount and frequency. In fact, the median verdict for the top 50 cases has doubled in the last four years. Due to changing EPA regulations, states are pursuing legal action more often against companies that pollute. Professional Liability and Directors and Officers lines also are taking a hit. Investors suing boards for mediocre performance is more common, as is individual legal action against doctors, architects, and engineers. Employment-related lawsuits are ticking up as well.
Insurers usually offset poor performance through investment income. However, low interest rates have restricted their ability to make up for underwriting losses. That makes passing those costs off in higher premiums the best way to gain ground.
What Business Factors Impact Insurance Premiums?
In a hardening market, the question isn’t will you pay more, but how much. Insurers look at three key areas when assessing the appropriate premiums to cover business risk.
What does your business do?
Insurers look at the amount of risk associated with your line of work. The higher the risk, the higher the premium. Construction companies often pay some of the highest rates for general liability insurance because of the potential to damage their own and other’s property. Insurers also look at the risk associated with injury to third parties. Unfortunately, construction and property management operations score as risky here too.
Where does the business operate?
Businesses operating in flood or wildfire zones will pay more. Insurers look at if you own or rent property, as well as who rents from you. Certain tenants, such as restaurants or bars, carry more liability.
What is your loss history?
Loss history is the least subjective of the three categories. The data clearly tells the story. A high number of claims or large payouts are a red flag. Insurers will consider this a forward trend and charge higher premiums to cover the risk. This also applies to litigation and settlements. Even when it comes to a corporate auto policy, one accident-prone driver can increase premiums for an entire fleet of clean driving histories.
How Is Insurance Coverage Changing?
Another way insurers are offsetting losses is by charging more money for less coverage. CGL policies cite restrictions in the Coverage A exclusions. The list of what the policy does not cover is getting longer. That leaves companies with three choices: eliminate the uncovered risk, budget for more out-of-pocket costs associated with the risk, or purchase additional insurance policies to cover it. Either way, businesses can expect to pay more money.
Based on insurance trends, look for more exclusions and payout limitations around:
- Weather-related events
- Business interruption from communicable diseases
- Commercial auto coverage for distracted-driving events
What Can Companies Do to Moderate Insurance Price Increases?
Okay, enough bad news. There are steps any company can take to temper insurance rate increases. Proactive risk management, proper planning, and data-driven decision-making is key.
Understand Your Loss History
Know your past losses and what contributed to them. Underwriters in a hard market are more likely to scrutinize loss histories. They will expect explanations for past claims and litigation. Most importantly, they want to know what your company is doing to mitigate those same types of losses in the future. Come with a plan in hand and data to show how it is performing to reduce claims and liabilities.
Shop Early and Shop Around
Insurance negotiations take longer in a hard market. Start the process early so an impending policy expiration does not rush the decision. This is especially true for niche businesses, those with increasing loss histories, or companies benefitting from historically favorable terms.
As part of the renewal process, take the opportunity to shop around. Identify if more competitive rates exist with another carrier without compromising coverage. Even if you prefer to stay with your current insurer, knowing what other options exist creates negotiating power. Plus, these discussions provide valuable insurance insights that can inform your overall risk management plan.
Finally, be specific with your insurance needs to receive accurate quotes. Higher premiums pale in comparison to the cost of catastrophic claims that could have been insured. Address liabilities—present and future—along with financial thresholds to cover those risks. Do not make the mistake of paying a higher price and still not having the coverage needed.
Determine a Safe Level of Risk
In soft markets, competitive rates make ample insurance coverage easy. Tough markets mark a good time to scrutinize your policies. Determine critical coverage needs and identify potential areas where accepting more risk may offer financial rewards. If loss potential is low in a certain coverage area, now might be an ideal opportunity to reallocate coverage to more high-risk areas to control total premium cost.
Track Internal and External Compliance
Many numbers contribute to a comprehensive risk picture. One of the most important, and most controllable, is insurance compliance. This will be a point of discussion in an insurance negotiation. If you do not know your compliance rating, or the number does not exceed 90%, brace yourself for some big rate hikes. Luckily, it is never too late to start a compliance tracking program.
Every vendor, supplier, tenant, and contractor should have active insurance with the contractually required coverage limits and endorsements as a minimum requirement for doing business with your company. However, compliance does not just apply to third parties. Internal tracking should occur as well. For example, employees using personal vehicles for work purposes expose the business to claims and lawsuits if they do not carry personal auto insurance. Far too many companies fail to track insurance compliance internally and open the door for very pricey losses.
Make myCOI Part of Your Plan
Managing your insurance renewal in a hard market requires preparation. When the time comes to sit at the negotiation table, include myCOI’s cloud-based platform as your compliance connection. Our software serves as an important part of a comprehensive risk strategy that underwriters adore. We automate the certificate of insurance tracking and management process for every external vendor and internal employee. Proactive alerts prompt COI renewals and our risk insights dashboard makes sure your company stays covered. The platform is built on insurance industry logic and leverages industry experts for added support. We help you manage the risk and erase the worry. See myCOI in action before your next renewal.