We live in uncertain times, and where there’s uncertainty, there’s risk. Costs are going up everywhere because the economy is slowing down and global unrest is getting worse. Insurance is no different. There are actually a lot of things affecting the commercial property insurance market at the same time, which is why the average cost of commercial property insurance is going up and many people are wondering why it’s so expensive.
This blog post will explain what commercial property insurance is, talk about how the market is doing right now, and give you tips on how to get the best rate possible to help ease the pain.
As a business owner I know securing adequate commercial insurance coverage is crucial to protecting my livelihood. However I’ve noticed my policy renewals getting more and more expensive lately. This led me to investigate – why exactly is commercial insurance so pricey right now?
After thorough research, it’s clear there are several key factors converging to drive up the cost of commercial insurance over the past few years. Here’s an in-depth look at the major components pushing prices higher:
Increased Frequency and Severity of Claims
This is the most direct reason insurance rates are rising across commercial policies, Data shows both the frequency (how often claims occur) and severity (cost per claim) have gone up significantly
Several perils are contributing to this trend:
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Extreme Weather Events – Severe storms, floods, wildfires and other catastrophes are becoming more common and destructive. This leads to a higher volume of large property and business interruption claims.
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Auto Accidents – Accident frequency is spiking as pandemic driving restrictions have lifted. Increased distracted driving and unsafe behaviors lead to pricier auto liability and medical claims.
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Cyber Incidents – Hackers are targeting small businesses at an alarming rate. Ransomware and data breach claims can easily cost tens or hundreds of thousands per event.
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Liability Lawsuits – Businesses are facing more litigation over discrimination, harassment, product defects, and other issues. Even frivolous suits are expensive to defend against.
No insurer wants to raise rates, but increasing claim costs force them to charge higher premiums in order to stay profitable.
Elevated Costs for Materials, Vehicles and Labor
When a commercial property needs repairs or rebuilding due to a covered claim, materials and construction costs have risen dramatically. This directly increases the claim payouts by insurance companies.
Some examples:
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Building Materials – Lumber, steel, and concrete prices spiked in 2021 and remain over 50% higher than pre-pandemic.
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Contractors’ Rates – Labor shortages have pushed contractor wages up nearly 15% in some areas, adding to claim costs.
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Auto Parts – Replacement parts for collision repairs are backlogged, with costs up 10-15% over the past few years.
Insurers have no choice but to raise premiums to keep pace with these elevated claim settlement expenses.
Reinsurance Rate Hikes
Most insurance carriers purchase reinsurance to transfer a portion of their own risk. When reinsurers face significant claims from catastrophes, they increase the rates charged to primary insurers. These costs inevitably get passed on to policyholders.
Global reinsurers reported aggregate losses of over $100 billion in 2021 alone. These massive payouts have forced double digit reinsurance rate hikes in many commercial lines – exacerbating the rising insurance costs.
Low Investment Income Environment
Insurers generate income from investing the premium dollars collected. In today’s low interest rate environment, carriers earn much lower returns on these investments.
Reduced investment income makes underwriting profits even more crucial. This puts additional pressure on insurers to raise premiums to cover rising claims activity.
How Inflation Impacts Commercial Insurance
As a business owner, I know inflation decreases my buying power and profits. But this widespread inflationary environment also directly impacts the property/casualty insurance industry.
Higher consumer price inflation correlates closely with increased loss costs and insurance premiums. Here’s why:
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Building material, auto parts, medical care and other costs tied to claims all rise with inflation. This immediately increases claim payments by insurers.
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When replacement cost coverage applies, higher construction expenses due to inflation must be covered when rebuilding damaged property.
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Workers compensation claims are impacted by wage inflation, as benefits are based on salary.
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Inflation can lead to more liability claims – consumers are more likely to sue when facing higher medical bills or income loss.
With US inflation hitting a 40-year high in 2022, it’s having a pronounced impact on claims and driving commercial P&C rates up across the board.
How Businesses Can Reduce Insurance Costs
While some factors are out of our control, there are still steps business owners can take to manage insurance costs in today’s climate.
My top tips for lowering premiums include:
- Increase deductibles to reduce base premiums
- Implement robust risk management practices
- Follow all loss control recommendations from your insurer
- Ask about any discounts for alarm systems, sprinklers, etc.
- Bundle multiple policies with the same carrier
- Maintain excellent credit and claims history
- Shop rates annually to find insurers with competitive pricing
Careful planning and being proactive with loss control allows me to partially offset the broader insurance rate trends. But it’s important to understand the major dynamics impacting the commercial insurance marketplace right now.
The Outlook for Commercial Insurance Rates
Looking ahead, experts predict continued pressure on commercial insurance pricing, but at a more moderate pace. We can expect single digit increases in 2023 and beyond rather than dramatic double digit hikes:
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Reinsurance – Global reinsurers are raising rates 4-7% versus the 15%+ hikes seen in 2019-2021. This will stabilize cost trickle down.
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Investments – Higher interest rates are improving insurer investment income somewhat.
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Underwriting – Insurers are tightening underwriting standards and raising deductibles to improve profitability.
However, loss trends remain very elevated in commercial P&C lines overall. It will take several years of lower catastrophe claims experience for the industry to return to more normal pricing levels. Patience and diligent risk management will be key for business owners navigating this market.
The complex dynamics making commercial insurance expensive underscore the value of having an expert agent to help craft creative solutions. I appreciate my agent’s guidance maximizing coverage while controlling premium increases. Their expertise is more crucial than ever in the current environment.
What’s The Current Market Like?
Today’s market conditions are turbulent, to say the least. A potent mix of factors has come together, resulting in raised commercial insurance rates across the board, specifically a 10.7% increase in the average commercial property insurance rate this past quarter. Here, we’ll break down some of the biggest contributors to this rise as well as some more general considerations that go into determining a commercial property insurance rate.
When mother nature comes knocking, sometimes even our best efforts aren’t enough to stop catastrophic damage to commercial property. Hurricanes, floods, wildfires, and tornadoes can all bring even the most prepared businesses to the brink. What’s worse, these events are happening with increasing frequency and severity due to the effects of climate change. As the number of catastrophic loss claims due to natural disasters continues to trend upward, so too will premiums.
Overall economic conditions play a factor in determining pricing in almost every sector and industry. Throughout 2022, the economy experienced something of a downturn and rise in inflation, while costs have risen at every level of the supply chain, leading to higher overall prices for goods and services. For insurance in particular and beyond the costs associated with inflation comes the higher risks of so much economic uncertainty.
The costs of fixing or rebuilding a house can vary depending on the location, the materials used, and other things, but they are currently going up across the country. A big reason for this is that prices have gone up at every step of the supply chain, as we already said. The rise in natural disasters only exacerbates the problem by piling up expensive payouts.
In the past few years, there have been more commercial property insurance claims. This is mostly because of more severe weather. With each of these claims resulting in a higher average payout, rates have risen in response.
Property location plays a major role in determining the cost of your policy. Your insurance rates may go up if you run a business in a place where crime is common or where natural disasters happen more often than usual.
Your commercial property insurance rate will probably be higher if your building is in bad shape or otherwise more likely to have an event that would make a claim happen because of its state. On the other hand, if you used expensive building materials to make your home, it will cost more to replace, which will cause your premiums to go up again.
The risks associated with operating certain types of businesses make insuring them a less sure proposition. Restaurants have busy kitchens where, if something goes wrong, the building could burn to the ground. On the other hand, running a small law firm out of an office wouldn’t cause as much uncertainty, and the premiums would reflect that.
Simply put, if you’ve filed claims before, insurance companies think you’re more likely to file another one. Insurers see this prior activity as indicative of future action. And if you’re more likely to file a new claim, you’re more likely to cost the insurer money.
Cybersecurity threats are usually not a threat to the property itself, but they are costing the insurance industry a lot of money to recover from attacks and take steps to stop them in the first place. This risk is not specific to the insurance industry and affects large and small.
When a catastrophic loss happens, it’s only right that you’re fairly compensated. Having said that, the recent trend toward bigger and bigger lawsuits is costing the industry money, which is being passed on to the insured.
What is Commercial Property Insurance?
One type of insurance that covers a piece of property used for running a business is commercial property insurance. It usually protects the building and the things inside it from things like storms, theft, burst pipes, vandalism, and explosions. Also, if a qualifying event happens to someone else’s property on your property, the insurance will cover it. If floods are a concern, you will almost always need an add-on policy. If businesses don’t get enough coverage, they could end up paying millions of dollars out of pocket if something happens.
Why Are Commercial Auto Insurance Premiums So Expensive?
FAQ
Why has commercial insurance gone up so much?
Why is commercial vehicle insurance so expensive?
How much is $1 million commercial insurance?
Why is commercial truck insurance so high?
Why is commercial auto insurance so expensive?
The more often a vehicle is on the road, the greater the likelihood of an accident. The driving record for anyone driving on behalf of a business is taken into consideration when determining the policy rate. The more accidents, claims and moving violations a driver has, the more expensive your commercial auto insurance policy will be.
How much does commercial auto insurance cost?
Because each company needs a personalized commercial auto insurance solution, it can be difficult to rely on these averages. The Hartford surveyed businesses in eight industries and reported a median premium cost of $55 per month or $662 a year.
Do you pay more for commercial auto insurance?
Type of cargo: If you haul hazardous materials, you’ll pay more for auto coverage than if you haul innocuous items. The same goes for hauling high-value items as opposed to less expensive goods. Credit history: You may pay more for commercial auto insurance if your business has a poor credit history.
What factors affect the price of a commercial auto insurance policy?
A commercial auto insurance policy provides your business legal protection from property damage and injuries in case of an accident. Buyers can influence some factors affecting the price of a policy — levels of liability and medical coverage, deductibles — but other variables affect the price as well.