Litigation, inflation, weather are key factors driving commercial lines costs

Even though the extreme supply chain shortages and rapidly rising inflation rates that accompanied the pandemic have subsided, many business owners still have concerns about the performance of the economy and how their business is being impacted.

Business owners are worried about the rising costs of materials, energy, labor, and equipment since inflation caused them to spike after 2021. In the years since, they have been looking for ways to trim expenses and protect revenue.

Our business owner survey reflects this concern and shows that insurance is one of the areas that is getting increased scrutiny for savings. According to survey respondents, about 80% said they have reviewed their insurance coverages with their agent in the past six months. Going further, more than 33% said they have reduced their coverage as a way to manage expenses.

Reducing coverages obviously comes at its own potential cost, and a confluence of factors heighten the risk associated with this strategy.

Below, we take a look at some of the chief forces influencing commercial lines costs, and some of the actions that customers are taking to help mitigate costs associated with coverage.

Key factors impacting commercial lines affordability

The cost of commercial insurance is influenced by a wide range of factors. From macroeconomic trends to business-specific considerations, understanding these variables can help guide policyholders. The factors below are some of the most significant that are driving up damages and claims costs.

• Extreme weather – Losses from extreme weather are a critical driver of insurance costs in specific states as more people and businesses are located in regions that have the potential for exposure to severe risks.

According to the U.S. Census, the South remains the fastest growing region in the country, adding 1.8 million people from 2023 to 2024.¹ That growth is more than all other regions in the country combined. Meanwhile, extreme weather in that region is driving up catastrophic events.

In 2024, there were 27 weather-related disasters across the nation that each caused more than $1 billion in damages for a total of $182.7 billion in damage costs (the fourth highest total since 1980), according to NOAA.² Hurricanes across the Southeast caused $124 billion of that total and killed more than 300 people. Severe thunderstorms concentrated in the South and Midwest were the most frequent event – and had the second highest total damage cost behind tropical weather at $46.8 billion.

The pace of catastrophic billion-dollar events continues trending upward as well. According to NOAA, there have been 115 billion-dollar events over the last five years (an average of 23 events per year), resulting in $746.7 billion in total damage costs. Since 1980, the country has averaged 9 billion-dollar events per year, adjusted for inflation, and as recently as the decade from 2010-2019, there were 13 such events per year. The increased frequency and severity of these events is a critical issue for insureds and carriers alike.

• Legal system abuse – Legal system abuse refers to actions taking place in the court system that raise costs for defendants and lead to abnormally inflated verdicts and settlements. Legal system abuse in all its various forms (social inflation, reptilian tactics, third-party litigation funding, etc.) is a key driver for the recent rise in nuclear and thermonuclear verdicts. For example, third-party litigation funding – the practice where an outside party funds a legal dispute in return for a portion of the proceeds – has become a growing issue for small and mid-sized businesses, insurance carriers, and policyholders.

Proponents of the practice argue that it provides more access to justice for people with valid claims, it can also have negative effects. According to a recent study by Swiss Re, litigation funding has helped create an environment of increasing insurance costs and decreased capacity. ³

Research shows a 57% increase in liability claims over the past 10 years due to legal system abuse and large jury awards, and AM Best data shows a 19% increase in litigation management costs from 2018 to 2023 – bringing total litigation expenses for the insurance industry to $24 billion of loss adjustment expense.⁴

President, P&C Commercial Lines, E&S/Specialty, Russ Johnston encourages insureds to strengthen risk mitigation services to help overcome legal system abuse.

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• Tariffs – Uncertainty over the exact levels and targets of new tariffs make it difficult to measure the precise impact that they will have on commercial lines insurance. However, economists have said that significant tariff increases on steel and aluminum are likely to lead to higher prices and reduced inventory levels for impacted goods and materials.

Resulting scenarios such as higher raw material prices or fewer available replacement parts have the potential to contribute to longer repair times, business disruption and overall increases in claims-related costs.⁵

Forecasts that have been issued point to higher replacement costs – up to 16.5% for personal and commercial auto and up to 14.3% in commercial property and homeowners.⁶

Listen to this episode of Economic Insights by Nationwide: Tariffs and other impacts on inflation

• Rising material costs – Continued supply chain turbulence and persistent inflation above the Federal Reserve target of 2% have led to a steady increase in costs of purchases, repairs and replacements of buildings, machinery, and vehicles. Meanwhile, insurers have been forced to increase rates to help pay for the increased frequency and severity of losses.

As an example of the rising costs facing consumers and insurance carriers, construction material costs increased 3.5% through the beginning of 2024⁷ and industry projections see a 5 to 7% increase in building material costs in 2025⁸.  There are concerns that tariffs could push costs higher that have been climbing steadily for the last decade. A new report from Verisk shows that reconstruction costs have climbed 63.7% since 2014.⁹  In addition they rose 10.7% between 2023 and 2024, outpacing inflation that climbed 2.9% in 2024.

The Insurance Information Institute also is forecasting that replacement costs will overtake the pace of inflation in 2025, including an increase in auto replacement costs for the first time since 2022¹⁰ (on average, the cost of new vehicles has risen more than 24% since 2019¹¹).

• Higher borrowing costs – Over the last five years, interest rates have changed substantially. Rates were at historic lows as the Covid-19 pandemic and resulting shutdown plunged the country into recessionary territory. However, that situation soon reversed as inflation skyrocketed to levels not seen in 40 years. In response, the Federal Reserve moved rates sharply higher, before beginning to ease rates as inflation moderated through 2024.

What that has meant for businesses is higher borrowing costs in the face of higher labor and raw material costs.

Actions customers are taking to reduce insurance costs

Given these cost drivers, many businesses are taking proactive steps to manage their insurance budgets without sacrificing critical coverage. Here are some of the actions they are taking to help mitigate cost increases.

It’s important for customers to note that some of these actions – such as reducing coverages or coverage limits – carry risks and can leave them with significant costs if a claim does occur.

• Implementing advanced risk management practices – One of the most effective ways businesses can help control costs and protect their bottom line is by introducing comprehensive risk management policies and practices. Risk management practices can help reduce the likelihood of a loss occurring that could lead to tragic worker fatalities or injuries, disrupt business operations, and necessitate costly repairs or replacement of equipment, vehicles and structures.

Examples of risk management practices that can help mitigate losses include:

• • Conducting regular safety audits on physical premises
  • Implementing disaster preparedness and business continuity plan plans
  • Training employees in workplace safety to minimize accidents
  • Installing safety equipment to prevent workplace accidents
  • Conducting routine maintenance to protect their facilities or fleet

Proactive behaviors like conducting background checks to help ensure qualified workers are hired, and having a water mitigation plan can all help prevent incidents that could lead to a costly claim or business disruption.

• Leveraging parametric insurance – Parametric insurance offers a path to mitigate specific risks. Unlike traditional coverage, it pays a predefined amount when a triggering condition or event, such as a natural disaster, occurs. This may allow businesses to manage risks like flood or earthquake damage more affordably.

This form of insurance has been around for decades, but is gaining attention as a risk-transfer tool as more precise data sets are more readily available. According to a 2022 report issued by Allied Market Research, the global parametric insurance market is forecast to hit $29.3 billion.

• Engaging in self-insurance – For larger, financially stable companies, partial or full self-insurance is becoming an option. Businesses set aside funds to cover smaller risks internally while purchasing coverage for catastrophic events only. It’s important for customers to obtain guidance on evaluating whether this approach makes sense, as it is important to ensure the pool is properly funded and can meet its claims obligations.

• Increasing deductibles – Carrying a higher deductible is a common cost-reduction strategy. However, clients must fully understand the potential financial impact of this choice and determine whether it’s sustainable for their cash flow. Aggregate deductibles are another solution that can help insureds cap the amount they pay for losses over a specific period and are more common in health care and product liability coverages.
• Investing in technology and security – Technology plays a dual role in reducing costs. On one hand, it actively minimizes risks through tools like surveillance cameras and fire suppression systems. Leak-detection systems can also be critical in identifying non-weather water issues before they become a larger, more destructive problem.

Technology can also benefit businesses by introducing efficiencies, such as using telematics to help plan more efficient driver routes and help control speeding, which can impact fuel consumption. Investing in automation can also support worker safety by requiring less manual labor and reducing the potential for injury.

Artificial intelligence can also be used to help optimize aspects such as quality control, supply chains and support worker productivity by automating business processes.

Follow-up actions you can take include:

• Have risk management conversations: Taking action to reduce risk helps keep workers safe and can minimize disruptions that can hurt business results. Nationwide’s Risk Management and Client Services has solutions that can be tailored to individual business needs across a wide range of industries. In particular, you can share resources that can help property owners make their structures more defensible and resilient to extreme weather. View Mark Berven’s video about climate resilience:

• Review policy details: Regularly updating property valuations, coverage limits and policy locations ensures that policyholders are fully protected in the event of a loss. With the rising costs and time involved in making repairs, failing to adjust coverage limits can result in higher out-of-pocket expenses. Additionally, reviewing policy details helps identify any gaps in coverage, ensures compliance with current regulations, and provides an opportunity to take advantage of new policy features or discounts.

• Access materials that can support conversations about inflation and disruptions:
  • B2B2C talking points about inflation and extreme weather
  • Use our client conversation guide on inflation