Rising Insurance Costs and What Your Business Can Do About It

Rising Insurance Costs

What a Hard Insurance Market Means for Your Business

March 13th, 2024 – by Eric Lonsinger

First, a quick disclaimer. The following is intended for informational purposes only and not for the purpose of providing professional or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem.

This explanation is going to be a bit of an oversimplification and is intended to help you as a business understand the practical implications of a Hard Insurance market by reviewing why it happens and the strategies your business may adopt to address it. We are not going to dive into the technical details such as the concepts of reinsurance but instead, focus on how these forces may impact the availability and cost of insurance for businesses like yours.

What is a Hard Market?

Well, it’s very much like it sounds. A Hard Insurance market is generally described as an environment where insurance costs are rising and the availability of insurance is more limited. Simply put, it’s harder to find or keep, affordable coverage. The definition doesn’t help us much, so let’s first try to understand why this happens and then, what we can do about it.

Why Are We In a Hard Market?

First, it’s important to understand that the Insurance industry is primarily managed and regulated at the state level – what this means is that various states may enter and exit hard markets at different times based on their current conditions. Ask businesses in Florida, California, Louisiana and Texas – they have been in a hard market for some time while other states are just starting to feel the burn. So what’s driving this Hard Market? Again, we’re going to oversimplify here, but generally speaking, there are 3 primary factors to consider:

Let’s quickly tackle each one.

Catastrophic Events
Turn on the news tonight. It seems like a new major storm, flood, wildfire, or other event occurs on a daily basis in today’s world. That may be a bit of an exaggeration, but the point remains – in the US we are simply experiencing more severe and more frequent catastrophic events that result in massive losses. According to various sources, since 2009 the US has seen a 335% increase in the number of structures destroyed by wildfires alone. This increase hits insurance companies hard. After all, they are the ones paying the lion’s share of the cost. Bottom-line, Insurance companies are paying more in claims than they were prepared for.

Inflation
If you’re reading this then it’s a safe bet we do not need to go into detail on this topic – inflation is pervasive in every part of our lives today. Costs for just about everything have noticeably increased over the last few years and guess what? Insurance companies are not immune. The costs of material and labor are way up, and when a vehicle or building needs to be repaired or replaced, it simply costs more today than it previously did. What makes this especially difficult is that when you combine the increased costs with increased losses (remember we just discussed how catastrophic losses are on the rise) the result is that insurance companies need to right the ship in order to stay afloat.

Regulatory Environment
As if that last two reasons didn’t pose enough of a challenge, some states make it so difficult for insurance companies to operate that it simply becomes unrealistic to continue to offer insurance in those areas. California is a prime example of this. Numerous insurance companies have drastically limited availability or completely abandoned the state because they cannot be profitable if they stay. For example, Prop 103 which was introduced in California in the 80s limits the rise of premiums to a maximum of 7% year over year. Think about that for a minute – take into consideration all of the information above, including the fact that everything costs roughly 18% more today than it did just a few years ago. If an insurance company is paying out more than it takes in, well then they need to adjust their rates or limit their losses. If they can only raise rates by 7% but that doesn’t cover the gap, then the choice has essentially been made for them.

What Does It Mean for You?

First, there is an important concept to keep in mind. A common occurrence we see is for clients to express frustration with their increased premium when they have not experienced any claims on their policy. Any increase in cost is understandably frustrating but, it is crucial to understand how insurance companies work. Each insurance company takes the premium from all their customers and essentially puts it into one big pool that is then used to pay against any claims that come up. This is what ultimately drives rates, insurance companies must ensure that the premiums collected across the board are sufficient to pay the losses that come through the door. So even though you may not have had a claim, others did, and the rates we all pay need to reflect the big picture. Otherwise, insurance companies simply could not exist.

Back to what you can do. Unfortunately, there is no magic wand to revert the insurance industry to a soft market and erase the challenges we face today. Inevitably, we will see more favorable market conditions in the future but in the meantime the best we can do is aim to understand what is happening and use the tools at our disposal to minimize the impact to our businesses (Insurance Agencies are no exception!).

The (unfortunate) reality is that you should plan to see increased premiums on your renewal policies. Nobody (including us) likes to be the bearer of bad news, but this is an unfortunate reality that we all must recognize. Now, it is not a guarantee that your premium will go up but, more often than not, it proves to be the case.

With that said, there are a few practical steps you can take to help put your business in the best position come renewal time:

Be Proactive
The first bit of advice is to be proactive and engage with your insurance provider early! Insurance carriers vary in the time they make renewal offers available – some provide 90 days of notice; others may leave it to the week before! The takeaway here is that your agent\broker may not always know exactly where your renewal premium will be. That should not stop you from evaluating your current situation and preparing for different possibilities. Your agent may be able to provide an indication of the rate movement they’re seeing in your area or industry. This information can be used to consider what steps may be appropriate to take.

Agents and brokers vary in their communication cadence and renewal process with clients. Some may routinely contact you 30, 60 or 90 days prior to your renewal to review, others may not. The best advice we can give is that if you are concerned about your renewal, reach out and initiate the conversation.

Review Coverage and Risk Strategy
This is a good idea at all times not just when your premium goes up. Ideally, you and your agent are communicating regularly to address updates and the changing needs of your business. It can be especially impactful in this market to verify your insurance coverage and risk tolerance are dialed in to meet your expectations. Let’s quickly review what this entails.

Reviewing coverage is fairly straightforward – typically you’ll want to look at the assets being insured like vehicles, buildings and business property – reviewing the details of each and, making sure the items and values are up to date. It’s easy to forget that you sold a vehicle during the year or perhaps you acquired a new piece of expensive equipment – the idea here is to understand what is currently on the policy and what changes should be made.

When we refer to “risk strategy” what we mean is having the conversation around what risk you as a business are ok assuming versus the risk you want to transfer. Assuming risk essentially means that you are comfortable with the possibility of a loss that you will be responsible for handling. Transferring risk is what insurance coverage does, you are transferring the risk of loss to an insurance company in exchange for the premium you pay.

Here is an example to illustrate this: Let’s assume your business owns a fleet of vehicles and you have a business auto policy in place to cover them. There are many coverages available, and you have the ability to select which make sense. For example, some businesses may opt to carry full glass coverage which may bypass the deductible in the event of a glass claim (i.e. chipped or broken windshield). When considering this coverage in your risk strategy you may look at the past number of years to understand how many glass claims you had and what you paid in premium for that coverage. If for example, you find that you had zero glass claims and paid $100 per year for the coverage you may make the decision to remove glass coverage and assume that risk. You will save the $100 per year on your premium but, if one of your vehicles experiences damage to the glass you will be subject to the policy deductible for repair or replacement. This is a balancing act between cost and risk and it’s ultimately up to each individual business to decide where on the scale they stand.

Deductibles
Deductibles are arguably the easiest lever to pull when trying to lower premium. Deductibles, if you are not familiar, are essentially a cost sharing mechanism used by insurance policies. They are generally present on all property policies, but you will also find them on some liability policies as well, sometimes referred to as “retention”. The way it works is that if you have a loss, let’s say it’s $10,000 then you assume responsibility for the deductible amount and the insurance company will pay the remainder. So, if you had a $1,000 deductible, that would be your portion of the loss and the insurance company would be responsible for the remaining $9,000. There are a few reasons deductibles exist, like reducing the volume of small claims being reported and thus reducing the processing burden on the insurance company. For you as the policy holder, the main consideration is the tradeoff between higher deductibles and premium savings. Generally speaking, the higher the deductible you choose, the lower the premium you’ll pay. This is because as you increase your deductible you are assuming more of the risk. This is a discussion you should have with your agent to understand the potential implications of the change, but in scenarios where it makes sense, increasing your deductibles can result in a meaningful reduction to your overall premium.

Alternatives
The last option we will discuss is seeking alternatives for coverage. It is generally recommended to explore your options prior to simply replacing your policy and there are valid reasons for this. For example, when applying for insurance coverage, one of the things that a potential new carrier may look at is how long you were with your current carrier and how often you change carriers. Insurance companies, like most businesses, have an acquisition and onboarding cost associated with bringing on new clients. Generally speaking, the ideal scenario is to create a partnership that will last. If there is a clear pattern of replacing policies every year that may raise concern and potentially impact your options.

That being said, there are absolutely scenarios where it makes 100% sense to look for alternatives. If you work with an Independent Agent, then this is one of the benefits you will receive. Independent agents are not tied to any one insurance company and typically have the ability to shop the open market. You, as the Insured, maintain the relationship with your agent and they are responsible for navigating the insurance market to find suitable coverage. If you have your insurance directly with a carrier or through a captive agent (who only represents one company) then the leg work will fall to you.

It is important to set proper expectations – the premise of this article is to explain that we are currently in a tough insurance market. Many people are seeing increases on their renewals (both commercial and personal) and immediately looking to replace the policy. We have seen many instances where the reality of the hard market sinks in after doing this, you may find that even with the increase on your current policy you are paying less than what other companies are quoting! Of course, the only way to know for certain is to look but, often times your agent can provide a good indication of where you stand.

Conclusion

At the end of the day, we’re not in an ideal insurance market – this applies to both providers and consumers of insurance. Insurance companies do not want to raise rates any more than you want them to! Unfortunately, just like the stock market, the insurance industry experiences the ebbs and flows of economic impacts. The key thing to remember is that markets are cyclical, and conditions will improve at some point in the future. In the meantime, Agencies like ours are extending the invitation to have the conversation and explore ways to help your business mitigate the challenges we’re all currently facing.