Why are Commercial Insurance Rates Increasing in 2021?
Over the past several years, you may have noticed the cost of your business insurance increase, and in 2021 you may have seen or will see an even greater increase in those costs.
So what’s going on with insurance rates for businesses in 2021?
What we have seen so far this year is that most businesses are seeing an increase in rates in just about all policies they purchase except worker’s compensation. This includes business owner’s type policies sold to the small commercial market to larger package policies sold to mid-market firms. In addition to increasing rates, we see a more disciplined approach to underwriting, which means that if you’ve had claims over the past few years, you may need to accept more risk in the form of higher deductibles. In fact, if you’ve had claims in a particular coverage line, you will see more dramatic price increases than your peers without claims activity.
What drives these Price Increases?
The insurance business runs in cycles of what we call hard and soft markets. Hard markets are defined as times when prices are increasing, and obtaining coverage may be difficult. On the other hand, soft markets are when prices are competitive, and the availability of coverage is pretty free and open. Cycles between hard and soft markets can generally last anywhere between 3 to 8 years at a time.
Those fluctuating cycles are driven by the insurance industry’s underwriting profitability, investment returns made on insurance company surplus or reserve capital, the economy, and the cost of reinsurance, which insurance companies purchase to spread their risk.
What we see in 2021 is a mixed bag of poor results. There have been back-to-back years of catastrophic claims in the form of wildfires, hurricanes, and floods. After several years of soft market conditions where prices may be depressed, there’s a lack of underwriting profit for many lines of coverage, the cost of reinsurance has been steadily increasing, and investments that insurance companies make in long term holdings such as mortgages, real estate, and bonds have been suppressed.
This all adds up to why insurers are increasing rates.
So what can you do about it?
If you see year after year of rate increases, my suggestion is to talk to your insurance broker first. Ask them why your costs have gone up? Are the costs unreasonable compared to your peers? Have they tested the market or gone out for alternative quotes before the renewal? Can they show you other quotes?
If you’re not getting a great response from your broker, it may be that you’ve outgrown them, and it’s time to move on.
Now, there’s a lot more to this than just getting quotes.
Have you reviewed your claim history? If not, I’d recommend asking your broker for a copy of what we call your loss runs for the past 5 years for all lines of coverage you have and then reviewing that with your insurance broker. The more claims you have, the higher your premiums will be, and the tougher it will be to get insurance down the road if claims activity stays that way. Efforts should be made to get claims under control, and that brings us to your risk management practices.
The larger your firm, the greater the impact risk management should have on your results. When you can demonstrate the methods and processes you have to control risk within your firm, the greater your credibility from underwriters who can use your risk management controls to help impact your pricing.
Here’s the bottom line – we’re going to see this hard market probably at least through 2022, maybe longer. For the balance of 2021, the general price estimated increases would be somewhere between 5% to 25% depending on your location, your operations, and your underwriting characteristics. Some lines of insurance will see higher renewal increases, such as fleet automobile, cyber, and D&O. Workers compensation, as mentioned, is probably the only line of business that may decrease or remain flat this year.
If you’ve got a renewal coming up in the second half of the year, speak to your broker at least 60 days before that renewal date to discuss what their expectations are and what strategies they are deploying to buffer potential increases.
If you’re not satisfied with those answers, give me a call, and let’s discuss your situation. I can describe our process for approaching a difficult market and how we can help you through it.