The commercial property and casualty insurance market is facing a hard market. A hard market is a period marked by increasing premiums and deductibles, and decreasing coverage availability.

This challenging environment has persisted for 26 consecutive quarters. It’s impacting businesses across sectors and making it increasingly difficult for companies to secure affordable and comprehensive insurance.

In this article, we’ll explain:

  • What’s driving the hard market
  • How it’s impacting different lines of insurance
  • What to do if you can’t find affordable coverage

What’s driving the hard market?

The Council of Insurance Agents & Brokers (CIAB) reports premiums rose by an average of 7.7% across all business account sizes in the first quarter of 2024, a slight increase from the previous quarter (7%). Small and large account premiums increased by an average of 7.3%, while midsize accounts experienced the highest increase for the fourth consecutive quarter, at 8.5%.

A couple of factors are driving this hard market:

Inflation

Inflation has led to increased claims costs, prompting insurers to raise premiums so they can maintain profitability. The escalating costs of vehicle repairs, medical treatments and property replacement have put upward pressure on claims payouts, forcing insurers to adjust their pricing strategies.

When insurers have to pay more on claims, they pass these costs on to businesses through higher premiums.

Nuclear verdicts

Additionally, there’s been an increase in exorbitant jury awards running into the millions of dollars and far exceeding the actual damages. This “nuclear verdict” trend has further exacerbated the hard market, particularly in the commercial auto insurance sector.

How is it impacting different lines of insurance?

Commercial property insurance

Commercial property insurance saw an average premium increase of 10.1% in first quarter 2024, according to the CIAB. Rising property values are making it necessary to buy higher coverage limits. Insurers are even requiring professional valuations of some properties to make sure their insurance coverage corresponds with their actual cash value.

With crime and weather-related events adding to the loss potential, insurers are pulling back from some areas or charging substantially more to cover their risk exposure. Insurers are also demanding quality risk management and sustained low claims at businesses that want insurance.

Complicating matters, the availability of skilled construction labor is low. This has increased the cost and duration of repairs and, as a result, the cost of insuring commercial property.

To control your costs, you will likely need to demonstrate to your insurer:

  • Regular maintenance
  • Top-notch building security
  • Accurate valuations
  • A disaster plan specifically addressing the threats your property faces

Many brokers and agents offer advisory services in the risk assessment and mitigation space. That expertise can be beneficial.

Commercial auto insurance

Commercial auto insurance experienced an average premium increase of 9.8% in the first quarter of 2024, CIAB data show. This surge is attributed to multiple factors, including escalating vehicle repair costs and supply chain disruptions.

Since 2022, vehicle maintenance and repair costs have risen by 23%, according to the Bureau of Labor Statistics. And the number of CIAB survey respondents reporting an increase in commercial auto claims has risen steadily, from 49% in the first quarter of 2023 to 63% in the first quarter of 2024.

Sky-high claims judgments are more common and more severe on average now as well. That means insurers must raise prices on everyone to stay in business.

Controlling your commercial auto insurance prices starts with making sure your drivers have clean driving records and follow established safety protocols. You may be expected to use telematics to monitor driver behavior and run regular checks on Motor Vehicle Department records. You will also need to have a clearly articulated and enforced substance-use policy for drivers.

Workers’ compensation insurance

Workers’ compensation insurance has seen a decline in premiums overall. The following factors have helped to cap losses:

  • An increased focus on safety
  • Advances in nonsurgical/nonhospital treatments
  • A reduction in opioid prescription
  • The use of fee schedules in many states
  • Aggressive claims management and return-to-work programs

You can keep your workers’ comp costs low by minimizing injuries and by making sure your experience modification factor accurately reflects your loss history.

Directors and officers insurance

Directors and officers (D&O) liability insurance is also experiencing a decrease in premiums on average. This is largely attributable to heavy insurer competition in D&O. Many new carriers entered the market in 2020 and 2021 due to a slowdown in litigation during the COVID-19 pandemic. That said, lawsuits are starting to heat up again, so premiums may start to increase.

What should you do if you can’t find affordable coverage?

The hard market isn’t just affecting premiums. It’s also impacting the availability of coverage. In some lines of insurance, the number of insurers offering coverage has declined because they don’t want to take on certain levels of risk.

Even when insurance is available, the amount of coverage offered in a single policy may be lower than in the past. Your insurance agent can detail ways to overcome these problems, but here are some common options.

Excess and surplus lines

One answer may be the excess and surplus (E&S) market, which specializes in insuring high-risk or hard-to-place accounts.

The E&S market offers more flexibility and customized coverage options compared to the standard market, but it also comes with higher premiums. This can be a viable option for businesses that can’t find coverage in the standard market due to their risk profile, lack of insurers in a certain area, or specific coverage needs. In extreme cases, you may need to turn to government-provided insurance for coverage.

Self-insurance

If your business has a good track record of managing claims, potential solutions include self-insuring. You can do this through a “captive” insurance company.

A captive insurance company is a legal entity that pools risk in a nontraditional way, outside the normal insurance company options. A captive can be either a single company insuring its own risks or a group of companies banding together to cover risks in a similar industry or peer group.

There are several types of captive insurance companies, but here are a few of the most common:

  • Pure captive: Also called a single-parent captive, a pure captive is a subsidiary of a single company and its affiliated businesses. It insures just those risks.
  • Group captive: A group captive is owned by several organizations. This option is often appealing to small and midsize companies that don’t have the capital to form a single-parent captive. A group captive can be formed of members from the same industry or members of different industries similar in size. In a group captive, your company shares the risks of many other companies in the group. That means some of the money your company reserves will go to pay for losses at other companies, but theirs will also help pay for yours.
  • Association captive: As it sounds, this option covers the risks of members of an association and their affiliated companies. Some smaller companies join associations to get this insurance benefit.
  • Risk retention group: Though it doesn’t have “captive” in its name, a risk retention group (RRG) is still a captive insurer. An RRG is owned by its members and covers only liability insurance. It insures group members with similar operations or activities or similar liability exposures due to their industry, products or services.

The market is tough, but you have options

The insurance industry is cyclical. Hard markets are typically followed by soft markets, characterized by lower premiums and broader coverage. But predicting the timing and extent of a market shift is difficult.

In the meantime, you can adapt to current hard market conditions by exploring alternative insurance options, working with an experienced broker who can help you navigate the complexities of the market, and implementing loss-control measures and improved safety protocols.

You might also talk to your insurance advisor about premium financing options that spread your insurance costs out over the year.