Businesses are reopening across the country and a sense of normalcy is cause for celebration. But you might want to slow down the festivities when your insurance renewal comes around.
Sticker shock: The new normal is far from business as usual.
While companies waited for supply to catch up with demand, other accidents didn’t wait—instead, they kept coming. Extreme weather events, various peaks, delays at international ports, protests, business and travel reopenings, labor shortages, war and inflation, added to the strain. Like the classic “I Love Lucy” scene where Lucy stuffs candy into her mouth in response to the increasing speed of the conveyor belt, insurance has struggled to keep up with catastrophic events.
The result is what is called a hard market. What does this mean for you and your business?
A “hard market” means competition and high prices
Insurance is in a tough market, which means prices are rising and insurance companies are becoming more selective about what customer liability they will accept. In the wake of the pandemic, the industry is experiencing an unusually large number of claims, from property damage to liability lawsuits. Insurance companies also pursue lawsuits on all sides, either to defend their customers or to protect themselves from customers suing them. While the courts are busy interpreting the meaning of insurance in these extraordinary times, insurance companies are refining their policy language and exclusions to limit the risk they are forced to take.
For you as a business owner, the insurance probably already feels overwhelming, even without the unusually high price tags you are facing right now. Now is an ideal time to get professional guidance and experienced advice on choosing commercial insurance that will respond when you need it. As the pandemic has taught us all, the difference between a good safety net and a bad one can be the deciding factor between a strong, resilient business and bankruptcy.
Rising inflation means increased insurance premiums in response to the economic climate (also complicated by a pandemic backlash). In addition to supply chain issues, worker shortages continue as labor and material costs soar. Weather events drive up annual catastrophic losses, putting reserves and reinsurers in a difficult position. The cost to repair or replace things is much higher, and premiums reflect that change.
Social inflation and the hardening market
Social inflation is on many agents’ (and lawyers’) lips as it has been a driving factor in increasing insurance costs. Social inflation is an industry term that refers to the rising costs of litigation, a widened lens of liability and jury decisions that result in higher awards. For example, some lawsuits have yielded jury verdicts in excess of $10 million (known as “nuclear verdicts”), which has only exacerbated the hardening market.
With that kind of money on the line, more plaintiffs are taking their chances at trial or fighting back rather than accepting initial insurance settlement offers. Paying up front, when it comes to insurance, means that higher costs are passed on to the consumer.
Supply chains also harden the market
Thanks to the pandemic, you’ll never be in the dark about supply chains again. In the early days of covid, limited access to paper products and electronics paved the way for supply chain discussions. Suddenly, the interconnected economy became part of normal dinner table conversation. Can’t get a laptop for months? It’s the supply chain. Lack of toilet paper? Thank the supply chain.
Right now we are experiencing a bit of 2020 again. Supply chains are once again the topic of conversation, but this time the problem is even more significant. Shortages of shipping containers, hold-ups at international ports and outrageous freight charges have created ripples in the downstream supply chain, affecting insurance prices.
Supply chain and social inflation may even lead to certain types of insurance ending up in their own supply shortages as insurers exit riskier markets. This means more competition with fewer insurance companies to absorb particular risks. It is no longer a buyer’s market.
What types of insurance are affected?
The short answer is that all types of insurance are affected. But here are some that may be more difficult to secure:
- Directors and Officers (D&O) insurance premiums are rising and insurance is harder to secure. D&O policies are responding to an increasing number of discrimination lawsuits (including wrongful termination due to covid-19, a story that continues to play out). Expect insurance companies to review your business if you are looking for D&O. They will look for robust employee handbooks, training programs and sustainable risk management plans as part of their application processes.
- Cyber liability insurance premiums are rising, but don’t forget about this important insurance. It is critical for any business that relies on the internet (pretty much all). The number of data breaches has increased every year, and so has the cost of recovering from a hack. Cyber insurance still has a wild west feel and lacks some of the standardized language you’d expect to see from other insurance policies. An experienced agent can help you understand what is covered.
- Employment practices liability insurance are tightening the rules for coverage. The #MeToo movement, followed by a pandemic that resulted in mass layoffs and other potential discrimination cases, created a tidal wave of lawsuits. The insurance companies transfer costs to the customers.
- Product liability insurance helps if a product you manufacture or sell causes damage to a property or person. But that doesn’t cover the costs of recalling it from the supply chain. As you can imagine, product liability is a big target area for lawsuits, deep pockets, and (you guessed it) steep insurance rates.
- Product recall insurance is a real asset if you are a manufacturer or part of a retail chain. If a product is withdrawn from the market, product recall insurance helps with the cost of removing, repairing or disposing of the faulty product. It also helps with PR. But in a supply chain, the cost of removing products from the stream is higher than usual.
- Marine insurance is a must if your products are part of the supply chain. If your product ended up on one of the barges in the Suez Canal blockade, you could have lost millions in business due to delays or destruction. If you waited for products that got stuck, you may have lost business revenue as well.
- Commercial truck insurance offers bundled coverage specifically for the trucking industry (such as cargo, commercial auto and liability). Truck insurance is essential, as lawsuits involving truck crashes have increased significantly. According to a CNBC report, lawsuits resulting in a jury verdict of over $1 million have increased by 1,000%, from $2.3 million in 2010 to $22.3 million in 2018. The pandemic truck driver shortage and commercial driver’s license requirements (along with nuclear convictions) only have increased costs, as insurance companies shy away from inexperienced drivers.
- Conditional Business Interruption Insurance (CBI). helps when the supply chain you depend on fails and results in a loss for your business. The semiconductor shortage, for example, has caused a major hiccup in the automotive industry. CBI cover can help car dealers deal with their losses.
- Interruption insurance (BI). is an essential part of doing business if you suffer a loss and have to close your business for a time. The coverage helps replace the income lost after physical damage to your business (such as a fire) and during the recovery period. But the exceptions to BI policies are being tightened due to covid-19 processes. Ask your agent about the nuances of wording in this coverage.
- Surplus insurance adds extended coverage for a specific type of policy that you name, such as commercial auto or liability. For example, truckers may use excess coverage for a particular shipment because of the transportation risks or the shipper requires it. The deductible used to be a way to save over an umbrella policy (given the limitation to a specific policy), but unfortunately this coverage is also higher.
- Umbrella insurance also extends policy limits (as the excess does), with the notable difference that it covers all active policies you have, not just one. It’s a smart move if you want to add higher limits across multiple lines, but the bad news is that umbrella policies have also entered a tough market. However, check with your agent – the cost may be higher, but it may offer wider coverage.
We are your secret weapon in a tough market
Independent agents serve their clients’ best interests, not the insurance company’s. Even in a tightening market, we will search for insurance that fits your needs and budget. We know which insurance companies are ready to take on your industry risk and which are not worth trying.
It is important that we have enough time to look for you. If you have some stuff on your record, you may have to pay more for coverage or go with a lower-rated carrier. We can help you market your business so that it becomes attractive to insurance companies. For example, if you have a history of claims but have been proactive about employee safety training, we can help you present that information to an insurer in the best possible light.
Going it alone or rolling the dice on an AI-recommended policy won’t give you a personalized approach. Competing for the cheapest policy is tempting, but a cheaper policy can also mean more exclusions and less coverage. And those are the policies that tend to get radio silence when you need help handling a claim.
Call us for a coverage review
If you have concerns about an upcoming insurance renewal, be proactive and call us. We understand your frustrations with higher insurance rates and can help you get the coverage you need at an affordable price.