Maybe you recently received your renewal notice for a particular line of coverage and were surprised at the rate increase. Perhaps you’re shopping for new coverage and you’re not sure what to expect.
There are a variety of reasons you might wonder how much your commercial insurance should cost, especially in these inflationary times. While the question is broad, and an accurate answer depends on many factors, gaining an understanding of the current pricing environment and the considerations that influence your premiums can help you prepare for purchasing or renewing coverage.
Is There a Guideline for What Insurance Should Cost?
For middle market businesses, the rule of thumb is you should expect your insurance premiums to average 2-3% of revenues. However, premiums can vary greatly from one company to another, in part because insurance pricing is based on risk and no two businesses have the same risk profile.
Insurance rates also go through cycles, which are influenced by factors like inflation and other economic conditions, the insurance industry’s most recent claims history, whether a particular type of risk is occurring more or less frequently, and whether the industry’s capacity for writing this coverage is expanding or contracting. In a soft market, rates tend to stay flat or decline; in a hard market, they rise modestly or significantly.
Your Industry and Type of Work Make a Difference
As you might expect, insurance pricing varies across different industries. After all, some industries inherently have a greater exposure to losses than others. For example, the manufacturing industry as a whole is likely to have a higher risk of worker’s compensation claims than the accounting industry. Conversely, accounting firms have professional services liability risks that aren’t relevant to manufacturers.
But even within a broad industry category, the nature of the work will differ among companies, and that impacts your insurance costs.
For instance, contractors have a higher risk profile than companies that employ people who work primarily in an office setting. But the category of “contractors” includes a wide range of business types—from lawn care services to roofing companies, electricians, HVAC installers, kitchen renovators, and many more. Because the nature of the work varies across those company types, so does the risk profile and therefore the insurance pricing. Contractors that work “at height,” like roofing companies, will pay more for certain lines of coverage than contractors that work on the ground, like lawn care services.
Similarly, the nature of an individual nonprofit’s work will directly influence its risk profile and premiums. A nonprofit that only works within the US may have a much lower risk exposure than a nonprofit that provides on-the-ground services in third-world countries where conflict and civil unrest are common.
The Coverage You Need Affects Pricing, Too
The type of coverage you need also affects your overall commercial insurance program costs.
For example, publicly traded companies and nonprofits need directors and officers (D&O) insurance to protect executive teams and board members from the risks associated with their roles. As of this writing, public D&O premiums are down significantly from last year, in part because recent legal rulings proved favorable to insureds with D&O claims. At a recent D&O renewal, one of our clients saw a 50% drop in its required retention and a 30% premium reduction.
On the other hand, organizations that own commercial properties are seeing large jumps in premiums, partly due to catastrophic weather events in 2022 that caused a spike in losses. With many insurance companies facing massive claims from Hurricane Ian and the devastating wildfires in the west, commercial property insurance premiums are increasing at an unprecedented rate, no matter where the property is located.
Builder’s risk is another coverage that is likely to bump up your insurance costs this year. With labor constraints still plaguing the construction industry and supply chain disruptions still hampering material availability, new builds and major renovations are likely to experience schedule delays and cost overruns—and that is causing insurance carriers to charge more for builder’s risk coverage.
For any company at risk of a cybercrime, it’s prudent to expect this line of coverage to cost more this year, too. After several years of soft pricing, businesses are seeing increases as high as 30-50%. If you don’t have the security measures that insurers expect, such as multi-factor authentication or threat detection, those rate increases might be even higher.
Your Claims History is Another Factor
Any time you submit an insurance claim, the carrier will likely increase your rates for that line of coverage at the next renewal. For commercial property insurance, water and wind claims tend to have the greatest impact on premiums. For worker’s compensation insurance, your claims history will directly affect your experience modification factor (EMF)—a figure that is multiplied by the standard rates to determine your company’s premium. The higher your past losses as compared to your peers, the higher your EMF and the greater your premiums.
How Can You Keep Insurance Costs Under Control?
While there will always be factors beyond your control that affect your insurance premiums—like catastrophic weather events or carriers pulling out of a market—there are steps you can take to minimize rate increases.
Ask your broker to do a loss review. At B. F. Saul, we start preparing clients for renewal about 150 days in advance. First, we conduct an internal review of the business’s loss history and open claims. About 120 days before renewal, we meet with our client to discuss our findings and any steps they can take to secure better pricing.
Resolve open claims quickly. Sometimes our loss reviews find there are open claims that can and should be brought to closure. The fewer open claims, the lower your loss reserves, and the better your renewal pricing.
Conduct a safety audit. B. F. Saul clients benefit from our on-site safety reviews, which provide a third-party, objective assessment of your safety training, manuals, and other measures. Based on this audit, our team recommends risk management improvements that will reduce exposure, minimize claims, and enable the business to obtain better pricing in the future.
B. F. Saul Insurance advisors have a wealth of experience in all lines of commercial insurance and extensive knowledge of the factors that influence premiums. For guidance on what to expect this year, schedule a call with one of our experienced advisors.