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Navigating a hard insurance market: What businesses need to know

The insurance market is characterized by cycles, fluctuating between soft market conditions and hard market conditions. Soft markets are favorable because of lower premiums, broader coverage and easier underwriting standards. Conversely, hard markets are characterized by stricter underwriting standards, higher premiums and restricted coverage. The insurance market has enjoyed soft market conditions for close to a decade. Unfortunately, that is about to change due to several prevailing factors that include catastrophic natural disasters, economic disruption, and social inflation.

Over the past few years, there’s been an increase in frequency and intensity of hailstorm, floods, hurricanes, and wildfires. And if that wasn’t bad, COVID-19 threw a wrench into every business’ financial plans by causing shutdowns and a major decrease in business revenue and payrolls. This has led to a lot of economic uncertainty and long-term business survivability concerns. Furthermore, the growing costs of legal defenses also present an increased risk for businesses. Social inflation, the latest buzzword in the industry, describes a societal trend towards increasing litigation, broader definitions of liability and larger compensatory jury awards. In the past decade alone, there’s been a 300 percent rise in the frequency of jury verdicts awarding more than $20 million in compensation to the injurer. Many businesses are at risk of financial losses due to lawsuits and increasing billable hour rates for lawyers.

Due to these factors, business owners will likely see an increase in their insurance premiums across all lines of coverage from commercial property, workers’ compensations, umbrella liability, and commercial auto to directors/officers/employment practices liability.

Factors that influence commercial insurance rates

There are several factors that can influence your commercial insurance rates. The more you understand the factors that go into your rate calculation, the more adjustments you can make to improve loss control efforts and secure favorable new business or renewal terms:

Coverage needs. Forms of insurance as well as the details of the coverage such as limits of liability and value of insured property will affect your insurance pricing.

Size of business. The more employees you have and the larger the revenue is, the higher premium you will pay for your insurance.

Industry. Certain industries carry more risks than others and will experience significant rate increases and coverage restrictions. Some of those industries include hospitality, heavy manufacturing, senior living, hospitals and healthcare, schools and public entities, food related products and construction/environmental businesses.

Location of the business. Businesses that are in areas prone to hail, wind, flood, riots and hurricanes will face higher insurance rates. In addition, the size of the building, construction type and concentration of buildings also affect business’ premiums.

Claims history. Businesses that have extensive claims history will be viewed as risky to insure and subjected to higher commercial insurance premiums.

Although many of these factors that influence commercial insurance rates in a hard market are unpreventable, there are many proactive ways businesses can take to gain favorable terms in a hardening market.

Ways to get favorable terms in a hardening market

Although commercial insurance rates will likely increase across the insurance market, there are multiple steps you can take to control losses and avoid higher insurance expenses in 2021.

Start new business and renewal process early

Being proactive and starting the insurance process at least 120 days in advance gives you more time to address risk and manage exposures, among other strategies. Your business will be better prepared for a hardening market than those who wait and will increase your chances of securing more favorable terms. In fact, taking a proactive approach to address risk exposures can make your businesses more attractive to insurer and may help you secure more favorable terms.

Review your commercial insurance policy regularly with your insurance agent

My team and I review our customers’ existing policies and procedures annually. We understand their business’ greatest exposures, which allows us to make recommendations and adjustments to their policy and risk management practices. Working shoulder to shoulder with our customers, we have helped many of them mitigate losses, rate increases, alternative risk sharing and helped enhanced their risk management measures.

Bolster risk management efforts

There are a few key components of a successful risk management strategy. Creating a solid business continuity plan to account for disasters and other unpredictable risks is a good approach to reduce potential business disruption. Pinpoint your risk exposure and cost drivers and be ready to pivot due to COVID-related or social inflation threats. For instance, work with an insurance agent to understand the effects of how COVID-19 continues to impact your business and develop a security and employee return-to-work plan. Manage claims efficiently to keep costs down and identify the best loss control solutions to address your unique business risks are also important to developing a successful risk management strategy.

Final word of advice

The hard market conditions are impacting the entire industry and certain risks will be hit harder than others. Businesses’ need for insurance expertise and customized advice in today’s climate is very high due to increasing risk complexity and exposure as well as a growing financial knowledge gap in insurance. Many business owners may be unaware of the severity or growing threats from employment liability, cyberattacks and social inflation. As a result, they may not be adequately protected from such risks. To mitigate losses from emerging risks, having adequate liability coverage is critical to prevent losses and potential increases in premiums.

Planning ahead with your insurance agent is the best way forward to identify areas to reduce risk exposure and find potential ways to offset a premium increase.

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About Robert Worden

Robert Worden has served as a Community and Personal Lines Sales Manager since 2018 delivering comprehensive insurance programs to meet community business operational risk management needs with the right balance of coverage and cost. By working with customers to first identify areas of risk and exposure, and then recommending solutions from highly rated insurance carriers with outstanding products and services, he can meet the unique needs of individuals, families, businesses and organizations. Before assuming his current role, Robert served as a commercial sales manager for Bremer Insurance. Prior to joining Bremer in 2016, Robert was the...

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