Here’s the scenario: You receive your small business insurance renewal notice, and your premium has increased significantly. You haven’t filed a claim in years or changed your coverage. You may wonder why business insurance is so expensive and why business insurance rates are going up. Business insurance premiums have been rising month over month for years. The primary reasons are natural disasters, inflation, and the cost of doing business for insurance companies. Discover other factors affecting insurance costs and what you can do about them to protect your investments.
Rising Business Insurance Costs
If you think your insurance rates are rising every year, that is because your commercial insurance rates are increasing. Since the COVID pandemic, the average cost of business insurance has risen approximately 6% a quarter. In fact, according to a market survey, for 25 straight quarters, commercial insurance premiums have increased.
In some quarters, the premium rate increase was nearly double digits. In 2023, commercial premiums rose 8% in Q3 and then 7% in Q4, for a total increase of 15% in only half a year.
Of course, business owners feel this cost. And the reality is that some may be using the rising costs of insurance to justify going uninsured. A recent survey by Next Insurance found that nearly 30% of businesses surveyed are uninsured.
Key Factors Affecting Business Insurance Premiums
There isn’t one single reason why business insurance is so expensive. Instead, there are multiple factors at play.
Inflation
The first factor affecting business insurance premiums is inflation. Inflation has been rising steadily for years, and one area hit particularly hard by inflation is construction materials and the automotive industry.
Construction materials cost 14.6% in 2021 and 15% in 2022. At the same time, the price has been decreasing since it is still significantly higher than it was previously. This increased cost also does not factor in the rising labor costs for construction, which have risen 22% over the past few years. Yet, even with higher wages, there exists a labor shortage. This shortage leads to project delays, increasing the cost.
The same is true for the automotive industry. In 2023, the Department of Labor found that the cost of motor vehicle repairs had risen by 23%. By September 2024, the price of repairing a vehicle increased by 5.3%.
Though less pronounced than just a year ago, auto body shops still deal with delays in obtaining motor vehicle parts. This delay goes back to supply chain disruption during the COVID-19 pandemic era.
Think of it like this: nearly every day, an insurance company has a property claim it tries to resolve. Between the increased cost of construction materials, wages, and delays, the cost to handle this loss has risen significantly.
Natural Disasters
Nearly every month, there is a news story about a natural disaster. Whether it is a flash flood, a wildfire, an earthquake, torrential rain, tornadoes, or a hurricane, some part of the country seems to be regularly experiencing catastrophic loss. The cost of repairing the damage, housing people temporarily displaced, and helping businesses recover comes from various sources, but the largest source is insurance.
These losses are costing insurance companies a significant amount of money. In 2023, insured losses for natural disasters were $79.6 billion.
The figure of nearly $80 billion is for one category of loss: natural disasters. That doesn’t account for all the other types of losses insurers face daily, such as theft, vandalism, fire, liability losses, worker’s comp claims, and automobile accidents.
Reinsurance
Perhaps the most significant factor driving business insurance price hikes is something most people don’t even know exists: the rising premiums insurance companies pay for their insurance.
Yes, insurance companies are also insured. This is called the reinsurance market, and reinsurance is “insurance for insurance companies.” Insurance companies don’t have the capital to pay out billions of dollars in claims every year, so they must work with reinsurance companies.
Reinsurers have been raising their rates significantly for years. This is done to encourage insurance companies to be more cautious in their underwriting (hence why you may get a nonrenewal notice) and more proactive in rate hikes.
Gallagher Re reported that rates rose by as much as 50% in January. Midyear renewals for insurance company policies in 2024 increased by 15% for accounts with losses and 10% for no-loss accounts. Reinsurers are expected to again push for a double digital rate increase at the end of the year.
Other Factors Affecting Business Insurance Premiums
Obviously, the above factors are all things that are entirely out of your control. These are not the only things impacting the cost of insurance. Insurance companies also zero in on several data points directly related to your business. These are as follows:
- The size of your business: If your business is very small and has low revenue, then the cost of a claim will be much less than if your business is midsized and has revenue over $5 million.
- The location of your business: Where your business is located matters, even down to the zip code. Some zip codes are more susceptible to loss or lawsuits than others.
- The type of your business: The industry your business is involved in will always impact your rates. A riskier business like construction or transportation will always pay a higher premium than something low-risk like a clothing boutique.
- The type of coverage: If you own a business that has expensive equipment or a large building, your rates will be much higher than those of a small business that rents a space and can get by with a general liability insurance policy.
- Your claims history: Unfortunately, if you’ve filed a claim as a business owner, you can expect to pay more for insurance. Usually, insurers only care about whether you’ve had a claim recently, within three to five years.
What You Can Do About Business Insurance Price Hikes
While many reasons business insurance is so expensive are out of your control, thankfully, there are steps you can take to control costs as much as possible.
- Compare business insurance quotes. Even though insurance companies are all experiencing the same challenges, some are better positioned to deal with them than others. Those companies can offer rates that are still competitive. By taking the time to get more than one quote, you can still find the same type of coverage you currently have but at a better rate.
- Be proactive in risk management. While you can’t control a natural disaster, there are things you can control. If you live in a coastal region, have hurricane shutters. If you run a business where customers enter, make sure your staff is trained and signage (like the wet floor) is clear and visible. Whatever steps you can take to limit a loss or make the loss minimal will help your rates in the long run.
- Pay for what you need. While it sounds cliché, there is such a thing as being overinsured. If your business is just starting, there are likely only one or two policies you need, and the limits don’t need to be $3 to $4 million. Insurance is scalable. As your business grows, you’ll want to make sure your coverage and limits keep pace with the growth and size of your business.
- Evaluate what you can afford. A deductible is the amount per claim that you agree to pay. Raising the deductible can lower your premium. But when you do this, you assume some financial responsibility. However, this may be worth the savings if your business is a low-risk enterprise.
Frequently Asked Questions (FAQs)
Commercial insurance rates are increasing for several reasons. Inflation, natural disasters, and the reinsurance market have been the main driving forces for the increase in rates quarter over quarter for the last few years.
Many insurance companies are exiting industries and states they feel are too risky. An example of a dangerous industry is houses of worship. California and Florida have seen several insurance companies exit this past year. If you received a renewal notice and you haven’t filed a claim recently, odds are the insurance company is shrinking its book of business to manage its risk exposure.
Don’t be afraid to gather some quotes from other companies. Some providers are better financially positioned to weather the current storm and still offer competitive rates. Review your coverages with an agent to ensure the policies you are paying for are right for your business, including the size of your business and its industry exposure to risk.
Bottom Line
Right now is a tough time for the insurance industry. I was working for a major carrier during the Great Recession of 2008, and while I watched people lose jobs all around me, insurance companies kept hiring.
Typically, offering a product that is either required legally or by lending institutions makes for a stable business model. However, this new economic situation is unlike anything I’ve ever seen. Insurance companies are going through multiple rounds of layoffs while struggling to turn a profit year after year. Unfortunately, it is only natural that they will have to raise rates for their customers as they struggle to bring the cost of losses down.
