The cost of insurance is influenced by many factors, including the costs to repair or rebuild buildings, employee medical costs, weather activity, and more. As these costs increase due to factors like inflation, insurance premiums may increase as well. Likewise, as costs decrease, so can premiums. Some factors that affect insurance pricing include:
- Businesses paying on medical claims
- Labor shortages
- Legal system abuse/social inflation
- Medical costs, including prescription drugs and health services
- Property and casualty replacement costs
- Supply chain issues
- Unemployment rates
- Weather activity
Underinsurance
It is important for policyholders to stay on top of their policy limits. For example, if your business owns a building, the building is insured up to a certain dollar limit. If a loss occurs, having adequate insurance coverage is necessary to cover the cost of rebuilding the structure. When our economy experiences high inflation, people can find themselves in underinsured situations due to increased material costs and values at the time of the claim. Having regular conversations with your agent and adjusting your insurance policy as needed will help decrease your risk of underinsurance.
Legal system abuse, social inflation, and nuclear verdicts
Legal system abuse, a driver of social inflation, occurs when a variety of tactics are used to fund more lawsuits and secure higher verdicts. Fraudulent or unnecessary litigation practices can accumulate attorney and court fees, which influences costs for insurance operations and policy pricing.
A rising trend attributing to social inflation is nuclear verdicts, which is when jury awards exceed $10 million. In recent years, these types of verdicts have seen a substantial increase, causing a ripple effect throughout the insurance industry. Both the frequency and dollar amount awarded are influencing insurance pricing.
Social inflation can be attributed to several factors, including:
- Changing attitudes toward litigation: societal attitudes toward litigation and the willingness to sue have evolved over the years.
- Erosion of tort reforms: tort reforms, which are laws limiting the liability exposure of defendants in civil lawsuits, can be eroded over time through legislative changes or court decisions. These changes can lead to higher payouts in lawsuits, which can influence insurance costs.
- Increased legal costs: legal expenses such as higher attorney fees, expert witness costs, and longer litigation processes can contribute to increased legal costs.
- Rising jury awards/nuclear verdicts: juries may be influenced by factors such as sympathy toward the plaintiff and perceptions of corporate wrongdoings, which may result in awarding higher verdicts.
- Media and public opinion: media coverage of high-profile lawsuits may shape public opinion and influence juries, potentially leading to awarding larger verdicts.
- Economic factors: economic downturns can increase the likelihood of lawsuits as individuals and businesses seek compensation for financial losses.
- Advancements in medical care and technology: these advancements can lead to higher costs and increased damages sought in personal injury lawsuits.
These factors can lead to higher claims payouts, higher insurance premiums, and other challenges, all of which have a significant impact on insurance carriers, agents, and policyholders.
Steps to help protect your business and employees
- Maintain a comprehensive workers’ compensation program that includes safety training and resources for your employees. Regular training and discussions around safety can help create a healthy workplace.
- A return-to-work program can help maintain profitability within your workers’ compensation program. This program provides access to claim representatives who work directly with all involved to help minimize the emotional and economic impact that can occur when a workplace injury takes place.
- Work with your risk management consultant to identify risks in your workplace. They can provide personalized employee training, provide safety programs, review any losses you may have had, and share methods to prevent them from happening again. Find your risk management consultant.
- Implement clear contracts and warranties to help reduce the likelihood of lawsuits. It’s important to have legally sound agreements defining expectations and responsibilities, as well as outlining the scope of services or products. This can help reduce confusion or dissatisfaction with customers, vendors, and employees.
- Talk with your independent insurance agent regularly about your operations and coverages. This can help you understand what your insurance policy covers, what it does not cover, and ensure your policy limits are up-to-date.
Frequently asked questions about insurance costs
It can be confusing to know where to start when evaluating your current coverage. It’s important to consider the factors impacting the price of insurance to make sure you and your business are adequately covered.
How can I measure my insurance coverage limits?
You can take proactive actions by reaching out to your independent insurance agent and ask them to conduct an estimated replacement cost evaluation of your facility, equipment, and/or stock. Your insurance agent can also suggest options for raising your business income policy limits to ensure you have adequate coverage.
What is Insurance to Value (ITV) and why is it important?
Insurance to Value is the relationship between the coverage amount on a policy and the actual amount it would require to rebuild the insured property. Having the right insurance coverage limits to meet rising rebuilding costs is crucial. You should also regularly assess the value of your business personal property (BPP) assets to ensure they are adequately covered.
What is Replacement Cost Value (RCV) and what does it mean?
Replacement Cost Value is the amount it would cost to rebuild a building from the foundation up. The RCV includes the cost to repair or replace the property with materials of comparable quality, considering the cost of supplies at the time of the loss. It is important to discuss RCV with your independent insurance agent when purchasing your business insurance.
What economic factors affect the cost to rebuild my business after a loss?
Supply chain disruptions, strong demand for manufactured products/services, and worker shortages can influence commercial property valuations and insurance costs.
What happens if it costs more to repair or rebuild than my coverage limit?
If your commercial property is damaged and the costs to repair or rebuild exceed your policy coverage limits, you may be responsible for covering the remaining costs out of pocket.
What coverages should I consider?
Your insurance agent will be able to help you choose the right coverages based on your specific business needs. Some coverages you may want to consider or discuss with your agent include business income, umbrella, product recall, equipment breakdown, and errors and omissions.
Find an independent agent
By connecting with one of SECURA’s carefully selected independent agency partners, you gain a trusted ally who works to understand your business, farm, or nonprofit, to help you find the right insurance provider and coverage.
