Why Commercial Insurance Premiums Are Rising In 2022 and What You Can Do About It.

This blog is for general information purposes only. Always consult with a licensed professional commercial insurance broker or agent for specific insurance advice for your Property & Casualty insurance.

It’s no secret that the business world has been buffeted by severe crosswinds over the last few years. From the pandemic to climate events to labor issues to supply chain problems, plotting a course forward has never been more challenging.

In an effort to help you gain insight into how this volatility is impacting your commercial insurance rates as well as provide potential strategies to help manage increases I wanted to take some time to share my knowledge.

Overview

Naturally, most business owners tend to see commercial insurance from their own perspective - the actual losses their businesses experience on an individual basis.

Of course, the premiums you will see when you renew your policy won’t necessarily reflect your individual experience because providers need to consider all of the risks the entire market has faced and will face nationally and globally - as well as any unexpected losses these insurers experienced in the previous year. (But your business’ specific history and practices can have an impact on premiums. More on that in a bit.)

The simplest metaphor is that of a reservoir of funds. Money is flowing in and out of this reservoir every year and the insurance providers attempt to accurately estimate how much outflow there will be so they know how much inflow they will need to keep an adequate level of money in the system.

It stands to reason that, if the outflow is greater than expected in year A, they need to increase the inflow in year B. And, if losses are expected to increase in year B as well, they need to increase inflow even more.

The Whys

We’ve all seen the whys in our news feed. There have been a record-setting number of weather events in recent years with 2020 being the most active Atlantic hurricane season according to NOAA. And 2021 was one of the costliest years for insurers ever with $105 billion in weather and natural catastrophe-related losses, as reported by Reuters.

We have also gone through a pandemic which has whipsawed our labor supply as well as the supply chain.

These issues have combined into a negative feedback loop. More frequent and more serious weather damage means more building projects. More building projects mean more demand for labor and building supplies. All while our labor pool and supply chain are experiencing scarcity. As a result, labor and material costs have risen significantly which has increased hotel construction costs and other real estate development expenses. In turn, all of this has increased the actual losses paid out by insurers.

2022 Reinsurance Treaties

We need to remember that insurance companies have insurance as well. In fact, the insurance companies that insure your business often have layers of insurance coverage from multiple reinsurance companies.

While it may sound complex it all comes down to the same simple idea that underlies all insurance. Distributing risk so the load is shared.

Twice a year the reinsurers who insure our insurance providers set the increases or decreases in their reinsurance rates based on complex prediction models which look at weather impacts and other risks. These are known as reinsurance treaties.

Another factor impacting pricing is consolidation in the reinsurance world which means there is less competition in the market, creating more upward pressure.

Lastly, low interest rates over the last few years made it difficult for insurance companies to generate low-risk returns on their capital, drying up an important flow of revenue.

The latest information from a variety of sources indicates that reinsurance rates may be going up by approximately 20% to 35% this year.

Of course, it doesn’t take a genius to understand what that means. Just like any business owner, insurance providers will be looking to maintain their margins while their reinsurance costs go up. Which means some of this increase will be passed on to business owners.

Strategies For Keeping Your Increases to a Minimum

Note: There are many variables I do not have the space to cover here including state-specific regulations, mapping, wind modeling, type of building wiring, your business’ loss history, replacement cost vs actual cash value, etc. As stated above, this blog is for general information purposes only. Always consult with a licensed professional commercial insurance agent or broker about your specific insurance needs.

When premiums are rising it pays to have as many insurers as possible want to insure your business in order to compare prices and coverages from multiple companies. The challenge is that in a hard market like this insurers are even more risk averse than usual and looking carefully for reasons to disqualify themselves as a potential insurance provider. With this in mind, the best strategy in a nutshell is to pay careful attention to everything you can control.

Property Coverage Tips

For hotels or properties you already own - Keep your facilities in good repair.

If your building has EFIS (Exterior Insulation Finish System) have it inspected and any defects repaired.

Make sure any bollards, parking stops and other parking area safety barriers are correctly spaced, secured and not damaged or missing.

Likewise, make sure your security and fire control systems are in good working order and to code.

Why is all of this so important? The insurance company underwriter isn’t just looking at your application and generating a quote. They will often do their own research on your property as well before deciding if they are going to provide a quote. This can include requesting photos and loss runs as well as doing online searches.

And, as many of you know, the company that insures your business will often hire a third party to do an on-site inspection of your property.

Problems found either in the initial research phase or during an on-site inspection may give the insurance company the impression a business isn’t sufficiently focused on reducing risk.

During the initial research phase, this can result in the insurance company with the most affordable coverage declining the opportunity to provide a quote for your business.

If they insure the property and significant problems are found in a subsequent inspection they will generate a list of recommendations and require the fixes to be completed within 30 days in order to keep the policy active.

So, since you are likely to need to make the repairs either way, it is advisable to do them ahead of time, creating a positive first impression with potential providers and attracting as many quotes as possible. Which gives you the advantage of comparing more prices and coverages.

For property you are considering buying - Any comprehensive analysis of a potential investment includes the ongoing ownership costs of a building as well as the actual purchase price and income potential. With rising commercial insurance rates, exposure to risk will be something to carefully factor into your calculation.

Real estate insurance rating isn’t simple but here are some issues to pay attention to which may help minimize increases to a building’s ongoing insurance costs.

First, what kind of building structure is it? All other things being equal…

A wood frame construction will tend to have a higher rate which generates a higher insurance cost.

Joisted masonry, with masonry walls, but floors and roof made of combustable material will typically have a somewhat lower rate.

Non-combustible, with exterior walls, floors and supports made of non-combustible material will tend to be lower than joisted masonry.

Masonry non-combustable construction will generally give you a lower insurance cost than the first three.

Modified fire-resistive with a fire resistance rating of at least 1 and less than 2 hours will tend to be lower yet.

Fire resistive construction with a fire resistance rating of at least 2 hours will often result in the lowest rates.

EIFS

The EIFS (Exterior Insulation Finish System) is another variable that can impact the cost of insuring a building. If a building has certain types of EIFS dating from before the year 2000 insurers may be more hesitant to insure the building. Or they may exclude that coverage if they do insure it because water may be penetrating the exterior cladding without the ability to drain. If coverage is excluded you will be paying out of pocket for any damages related to your building’s EFIS.

(Here is an informative video posted by Ben Gromicko featuring Ron Huffman, a licensed engineer, explaining the differences found among various EIFSs as well as examples of some typical construction defects.)

Fire Safety Systems

The impact different fire safety systems have on insurance costs can be as complex as the systems are important. There are so many variables, including things like the number of floors, building construction type, type of alarm system, building codes for the location, presence of sprinklers, etc, that providing specific guidance requires a case by case analysis.

But here are some general thoughts to keep in mind.

A good rule of thumb is that the newer the building, the more likely it will be to code and the more favorably the underwriter may view it.

A few other things to look for when it comes to hotels and other residential real estate are central station monitoring, a sprinkler alarm system that covers the entire building, manual pull alarms, and hard wired smoke detectors. These items sometimes allow the underwriter to apply credits which can lower insurance rates.

Lastly, if you are planning on a new construction in 2022 or 2023, think about balancing any savings on construction costs with how those choices may increase your long term operating and/or insurance costs. Unfortunately, in my 20 plus years as a commercial insurance broker I have seen too many cases where “saving money” has turned out to be very expensive.

Liability Coverage Tips

Here are a few things you can consider to help minimize any increase in your liability coverage costs for 2022 and 2023 especially if you are looking for hospitality insurance.

General upkeep. If there are cracks/damage to your stairs or sidewalks, loose handrails or banisters, have them repaired. Take a careful look at carpeting on floors and stair treads. If any edges or seams are pulled up or worn, repair the carpet where needed. These are simple steps many hotel owners put off but can be important for preventing claims as well as reducing costs should a claim occur.

Bathrooms should have grab bars and tubs should be non-skid. If the tub is older, the non-skid surface will likely be worn and the tub will need to be resurfaced. I would also recommend grab bars in the tub and/or showers as well.

Lighting should be abundant and in good working order.

Exit signs should be properly marked and emergency doors should be free of any obstacles.

Employee training. Have a comprehensive employee handbook and a regular training regimen to ensure that guidelines are understood and followed. When insurance providers see that you take training seriously they will more likely view you as a partner in preventing avoidable losses from happening. With a market this tight, any sign that your business management is lax may lead to an insurer to walking away from you as a potential client rather than risk losing capital on losses that were preventable. On the positive side, if they see that you take employee training and related risk mitigation seriously they will be more willing to provide an attractive quote.

Security systems. Nothing prevents frivolous liability lawsuits like clear video evidence. While accidents happen, there will always be those looking to abuse the system by filing frivolous lawsuits. When an insurance company sees a well designed and maintained video security system they know they’re less likely to be burned by excessive legal fees and settlements related to questionable claims.

Boiler and electrical rooms should be free of clutter. Any chemicals should be stored safely and securely and should not be in proximity to the boiler or electrical panels.

Online customer reviews. It’s not just potential customers who read your online reviews. Insurance underwriters will take a look when reviewing your application too. Most are experienced enough to know that there will always be someone looking to complain about minor things but if they see a pattern of complaints online they may decline to even provide a quote.

It goes without saying, the best technique to deal with this is to avoid delivering a bad customer experience in the first place (See the Employee Training section above.). But, should a customer have a complaint, don’t ignore it. Make sure you communicate in a clear and professional way with the customer in accordance with your company policy while doing your best to resolve the issue. That way, if the customer is being unreasonable, anyone reading the review will be more likely to see it for what it is and see that your organization has handled it in a professional way. A positive way to view a complaint is to see it as an opportunity to exhibit your professionalism as well as your clearly defined customer relations and business management policies.

I hope this post helps you better understand the 2022 commercial insurance environment and how you can better manage it. If you would like to discuss your specific commercial insurance needs feel free to send me a message.

Image by Mudassar Iqbal from Pixabay