Did you know that commercial insurance policies rose by 22% in the last quarter of 2020? You may think that this has something to do with the infamous pandemic of the year, but it doesn’t.
Business insurance rates have been rising for years. And, they’re projected to keep rising as long as trends continue.
But, what exactly is making business insurance premiums rise? And, what can you do about it?
To learn more about the rising cost of insurance, keep reading. We have everything you need to know.
Social Inflation
Over the past few years, several social factors have caused a higher rate of claim payouts. This means that insurance companies are paying more for the things that businesses are paying them to insure.
Here are some of the common changes that have been taking place over the past few years:
- Increased litigation
- Broader definitions of liability
- Legal decisions that favor clients over the insurance companies
- Juries dictating larger compensatory awards
All of these social factors are contributing to social inflation.
The Causes of Social Inflation
But, why are all of these things happening? Why are more and more cases leaning in favor of the client rather than the insurance company?
Well, because of general anti-corporate sentiment – many jurors and judges find it hard to favor the insurance company. Among these sentiments are claims that insurance companies seek to make money off of their clients rather than help them.
Plus, there is increasing recognition of litigation funding strategies. This occurs when third-party investors agree to cover the client’s legal fees if they can receive a portion of the damages that the client receives.
Because of this, clients are going to push to receive even more money in damages in an effort to pay these third-party investors.
Thus, insurance companies end up paying even more.
All of these social factors together have driven insurance companies to pay more than ever for insurance claims.
Price Inflation
With social inflation is actual inflation. Over time, the cost of doing business increases. This is because labor costs as well as the cost of goods increase.
Your rent increases. Your employees’ salaries increase. Your utilities increase in price.
It’s all because of price inflation.
Just like any other business, insurance companies are looking to make a profit. So, they want to see a return from their clients. This means that they can’t be spending more on claims than they are receiving from their clients.
So, if they find that their costs are increasing, they have to also increase their income somehow. They do this by increasing the premiums for business insurance.
By receiving more money from every single client that they have, they will have the ability to pay more claims for more clients.
In the end, this increase can actually help you, too. No one wants to hear that their insurance company can’t pay. So, if your insurance company does have the ability to pay because of higher premiums, you’ll be better protected.
So, paying higher premiums may seem like it’s a detriment now. But, it may save you and your business in the future.
The Insurance Model
As you’re contemplating new insurance premiums, you have to keep the standard insurance model in mind.
Insurance companies work better with more clients. The more client they have, the more income they bring in. The more income they bring in, the more claims they can help with.
But, on the other hand, more clients bring more possible claims. Thus, the insurance company pays more for claims in total.
Insurance is a gamble.
The insurance company is gambling that you won’t need to use your policy. You’re gambling that you will need to use it.
But, the important point to note is the concept of community sharing. Insurance companies work because it’s highly unlikely that every single client will need coverage at the same time.
So, the insurance company can use the money that it’s making from other companies to pay for one company’s claim. Then, the insurance company can use the extra money to pay their rent, utilities, salaries, and more.
That’s how the insurance model works. They’re hoping that the amount of money that they bring in is more than the amount of money that they’re spending on claims.
To make sure that this relationship remains true, they need to increase business insurance premiums from time to time. This helps the insurance company make sure that they’re making more than they’re spending.
It’s just like any other business.
Severe Weather
Recently, the United States has also been undergoing several natural disasters. From wildfire and droughts to hurricanes and tornados, US citizens are experiencing more natural destruction than ever.
In fact, according to the National Oceanic and Atmospheric Administration, this is the sixth consecutive year that the United States has had at least ten independent billion-dollar disasters.
Because of these natural disasters, more businesses are making claims to their insurance companies. Thus, the insurance companies are helping more businesses come back from disasters like these. So, they’re losing more money than they normally would.
Unfortunately, the current data does not help insurance companies plan for these disasters. Scientists do not have long-term predictors for these kinds of disasters. We only know that they’re happening more often.
So, insurance companies are simply raising their premiums. By doing this, they’re protecting their financial interests and ensuring that they have the funds necessary to help businesses that may fall victim to one of these natural disasters.
To be clear, there is no way for insurance companies to confidently know whether or not a natural disaster will affect your business. So, these companies are erring on the side of caution. Thus, they’re charging more via the premiums for business insurance.
All in all, it makes sense for your business insurance premiums to be rising if you live in or near any of these areas. You may be paying more to protect yourself in case of a natural disaster.
Economic Impact
Due to many contributing economic factors, insurance companies are seeing an increase in their loss ratios. This causes a decline in investment income for the companies.
In turn, the insurance companies aren’t producing the return that they used to make.
Fortunately, workers’ compensation is not one of the economic factors contributing to this. So, there are more favorable short-term rates when it comes to this kind of coverage.
However, there is one catch.
Workers’ compensation insurers are concerned with rising medical costs. These could negatively impact loss ratios for profitability and sustainability. Thus, this could cause rates to skyrocket for this kind of insurance, too.
On top of this, the implementation of presumption laws requires benefits to apply to employees who contract coronavirus. Because of the high infection rate, this will cause higher compensatable claims. Thus, the insurance company will be paying more to care for these employees who have contracted the virus.
And, medical treatments for pulmonary diseases are not cheap. In fact, the average coronavirus patient costs $51,389 for patients ages 21 to 40 and $78,569 for patients 41 to 60.
When insurance companies have to take on these costs via workers’ compensation claims, they add up. So, you may find your premiums increasing because of medical reasons like these.
Cybersecurity
Security and privacy risks are becoming more and more alarming. As companies dive deeper into the technological scene, there are more risks.
From file storage to client information, businesses are legally responsible for keeping private information locked away. This is while others work hard to uncover and maliciously receive that information.
And, with ransom payments from those cyberattacks, it seems like businesses (and insurance companies) can’t keep up.
As cyberattacks happen more frequently, businesses claim more from their insurance companies. And, as claims increase, cyber insurance rates increase.
Insurance companies have to be able to pay ransom costs, account for lost data, and more. These increasing demands mean that cyber insurance companies are losing more than ever.
So, they’re increasing their premiums to make up for the loss that they’re experiencing.
It’s also important to note that exposure to cyberattacks is becoming more prominent. As we explained, more and more businesses are relocated things online. Thus, there are more things for malicious people to get their hands on.
With this, the general increase in ransomware and social engineering attacks makes it more difficult to protect today’s businesses. So, to ensure that you’re fully protected, your insurance company has to increase the cost of insurance.
Better Business Insurance Premiums
If you’ve had enough of the business insurance premiums that you’re paying now, you should consider different options. In particular, we recommend that you check out the rate that we can give you.
Our team here at Insured ASAP can help you compare different rates from different insurance providers. So, we can help you get the best quote for your business insurance.
So, what are you waiting for? There are better options out there. And, we can help you find the best ones for you.
Get your quote today!
