It has been a challenging year for insurers and consumers alike. With commercial insurance costs rising around the globe, every industry has felt the increase. And these soaring costs pass to consumers through the inflated cost of goods and services.
Many policyholders saw midyear renewal increases, even those with no changes in loss activity. Increases were higher for those with more challenging property classes or property struck by a recent catastrophe.
Let’s examine why commercial insurance rates are rising and what the future may hold.
Soaring Commercial Insurance Rates Stress Businesses
Several factors contribute to rising commercial insurance rates.
Inflation affects every corner of the economy, including the risk and insurance business. When costs and expenses are higher, companies need to raise rates to stay profitable or stay in business. This is true of insurance companies, too. Overhead costs are more expensive when inflation increases, and policyholders pay for some of these elevated expenses through higher premiums. Experts predict current inflation levels will continue through at least mid-2023.
Supply Chain Disruptions
New vehicles are hard to come by, and replacement parts are in higher demand. Ongoing issues with supply chains continue to cause delays and elevated costs. Repairing damaged vehicles and property is more expensive and takes longer, which raises the overall claims cost.
Cost of Doing Business
For many insurers, the cost to adjust claims has increased. When gas prices hit all-time highs in June of 2022, insurers had to spend more to handle claims. Sending a field appraiser to inspect damaged vehicles and property started to cost a lot more in gas. While some companies pivoted to digital methods like virtual appraisals, the increased loss adjustment expenses still led to more expensive claims.
Litigation costs have been steadily rising due in part to social inflation. The public perception of the insurance industry tends to affect settlements, with emotional jury appeals leading to higher verdicts in some jurisdictions. These inflated verdicts raise claims costs, which in turn causes premiums to increase. A recent study showed social inflation increased commercial claims payouts by $20 billion from 2010-2019, and the trend seems like it will continue.
Exploding Cyber Costs
Cybercrime is on the rise. A ransomware attack affected 37% of businesses in 2021. With more ransomware, malware, and phishing attacks than ever, businesses in every industry and of every size are at risk. And more companies are starting to realize their exposure and purchase insurance, either stand-alone cyber policies or an add-on to an existing commercial policy. Since insurers are paying more for cyber losses, rates have risen for this type of coverage — adding to the rising commercial insurance rates.
Agents Can Help Policyholders Manage Rising Costs
Agents and brokers play an important role in helping policyholders understand and manage rising insurance costs. It is always better to be honest and transparent when rates are rising — and to tell your customers as soon as possible so they can prepare. Meet with your clients before their renewals to explain cost increases. If you know a client’s premium will increase, tell them, and offer to shop around for the best rate you can find.
Being an independent agent gives you an advantage in a tough market since you can shop your client’s business to many different insurance companies. You can always contact another insurer if the first one comes back with a too-high rate.
Finally, work with your clients on risk mitigation and risk management techniques. Many policyholders don’t understand how basic risk management can help reduce losses. If they can do more to lower their premiums, explain this to them. Show them the connection between loss history and premiums so they understand the importance of reducing their claims frequency and severity.