Commercial insurance rates are increasing on nearly every line of coverage thanks to a rise in the frequency and severity of claims. Business owners are noticing significant premium hikes during policy renewal. What might not be as apparent are:
- Changes to policy requirements
- New coverage limits
- Policy exclusions that carriers are enacting to limit future liability
To protect your business interests, you need to know what questions to ask and what to look for when renewing your insurance policy. Here are some pointers.
Why are your insurance premiums increasing?
For several years, claim payouts have exceeded what insurers have earned. This is due to a combination of factors:
- A steady increase in extreme weather events
- Lawsuits and nuclear verdicts (verdicts over $10 million)
- Inflation
- Poor returns on insurers’ investments
Insurance companies are losing appetite for risk, including how they spend and invest their capital. Businesses they insure are a part of their investment capital strategy. As finances get tighter, insurance companies begin offloading the businesses they think are at risk for catastrophic payouts.
At the least, they respond with higher premiums to compensate for higher pricing. At the worst, they exit markets completely.
Property and commercial auto insurance have been hit particularly hard due to extreme losses and the rising cost of materials and labor. Premiums have risen across most major commercial lines of business, according to the Ivans Index Q4 2024.
Ivans spotlighted premium renewal rates in the fourth quarter of 2024 across several standard commercial lines:
- Commercial auto increased to an average of 9.82%.
- Business owners policy premiums steadied at 9.09%.
- General liability premiums decreased to 3.98%.
- Commercial property premiums rose to 11.11%.
- Umbrella rates increased slightly, averaging 8.76%.
Cyber liability policies
Cyber liability insurance stands out with particularly volatile rates. According to the most recent Fitch Ratings, stand-alone cyber liability policy premiums declined 3% in 2023. Even so, the demand for cyber liability insurance remains high. Past premium increases of 15% in 2022 and 34% in 2021, along with a shift in underwriting practices, may have raised competition in the cyber insurance sector.
Cyber loss risks may amplify with the Security and Exchange Commission’s adoption of compliance regulations requiring public companies to disclose cybersecurity incidents. They must also report their cybersecurity management, strategy and governance plans annually. Industry specialists indicated that catastrophe exposures from cyber events are complex and harder to model than traditional risks like natural disasters. It’s challenging to predict maximum losses due to an extreme cyber event.
The decline in cyber premium may shift again as technology evolves.
According to Risk Management magazine, more nonadmitted carriers are writing cyber insurance policies. These are insurance carriers that the states don’t back or regulate, allowing them to set premiums and exclusions without much scrutiny.
It’s important to understand what your coverage includes if you go the nonadmitted carrier route.
How have business insurance policy terms changed?
Insurers can do more than raise their rates to control their losses. In the case of cyber insurance, they’re excluding certain kinds of cyberattacks and demanding that policyholders demonstrate good cybersecurity before issuing policies.
Across commercial lines, insurance companies are also:
- Requiring businesses to have higher deductibles (or retentions)
- Excluding high-loss perils
- Setting lower policy limits to offset how much they’ll cover in case of a total loss, which might be less than an event actually costs
- Establishing sublimits, which are lower levels of coverage than the overall policy limit for specific losses
Here are some coverage changes to look out for:
Property insurance:Â Insurers are requiring updated property valuations because rebuilding costs are so high. They are also establishing policy sublimits (for mold and other water damage, for example). They’re also limiting coverage in high-risk areas, making it more difficult for businesses to get insurance in some locations.
Business interruption coverage for weather-related shutdowns is also becoming pricier and more restrictive. And policy terms are being changed on vacant property clauses, affecting how many days a property can be vacant before it is no longer fully insured.
Liability:Â Some policies are becoming more restrictive, particularly for environmental and pollution, abuse and molestation, and assault and battery coverage. More insurance carriers are limiting their exposure to these claims due to the expense. In addition to coverage changes, businesses must determine if they need to upgrade their commercial insurance to protect against liabilities arising from new laws and regulations.
Pay attention to clauses that limit who is covered. For example, general liability and business owners policies don’t cover you if an employee sues you for discrimination, harassment or other employment violations. You’ll need to add employment practices liability insurance for that.
Commercial auto:Â Inflation, high-tech vehicles and an increase in the severity of accidents are making auto repairs more expensive. Bodily injury claims have also risen substantially. Insurers are responding by increasing deductibles and giving preference to companies with good records and fleet management.
Many insurers now require policyholders to work with preferred auto shops when handling claims. Some require telematics or other driver behavior monitoring. And if you have electric vehicles or connected fleets, you could be at risk for a cyberattack. This isn’t covered by auto policies. You’ll need cyber liability insurance.
Understand your coverage
The first and most important thing is to read every part of your commercial insurance agreements. Look for what they cover and exclude, and scrutinize sections that contain terms such as:
- Arbitration
- Sublimit
- Requirement
- Responsibility
- Exclusion or excluded
- Limitations
- Coinsurance
- Payment threshold
- Conditions
- Not covered
These terms will help you understand when your insurer will pay, how much they will pay, what you must do to qualify for payments, and how coverage disputes will be handled.
Read the definitions of your policy, too. Most people skip them, but they are the guardrails of your insurance contract. You might have some wiggle room to argue something not mentioned in your policy, but if it’s explicitly excluded, that’ll be a swift denial.
Strategize your insurance plan
Enter the process with your budget in mind. You might be able to take on more financial risk yourself in some areas. This technique can free up money to shift into larger policy limits or enhance coverage in higher-risk areas.
Play up your strengths so your business is attractive to insurance companies. Insurers typically give lower premiums to organizations that demonstrate good risk management and have fewer claims. Your agent or broker can help your cause by showing an underwriter your qualifications. They can often negotiate better terms by getting to know your business and then selling your story.
Tap your agent’s knowledge. Your agent might visit your business to evaluate the risks of your property and operations. They’ll suggest improvements to place you in the most favorable light. When they market your company with the insurance carriers, they’ll highlight your pro points to show you’re a worthy risk using things like:
- Claims statistics
- Property inspections
- Corrective actions and improvements
- Employee safety training records
- Risk management programs
- Cyber response programs
Add to your standard coverage using endorsements or riders. Endorsements sometimes allow you to include coverage excluded from a standard business policy. They cost extra, but it’s worth getting a quote comparison to weigh the costs against the benefits.
Use multiple insurance companies. An alternative to an endorsement is going with a different insurer specializing in your industry or risk area. An independent agency has relationships with many insurance companies to help you compare policies. Pricing, coverage options, claims processing, customer service and value-added services (like free risk audits) should play equal parts in your coverage comparison.
For example, say you’re a tree-felling company that uses heavy machinery and tools. You might decide to use three different insurance companies: one for equipment used in transit, one for business vehicles and another for business liability. Since each specializes in a specific risk area, you get the best coverage options.
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