Middle market trends and the era of uncertainty

KEY HIGHLIGHTS

• Coronavirus, cybersecurity, the opioid crisis and extreme weather are creating historic challenges.
• It’s vital for businesses to understand their exposures and what they can control and manage.
• Proactive loss control efforts are crucial in this environment.

The insurance industry is cyclical in nature, ebbing and flowing between hard and soft markets. While insurance professionals and buyers have come to expect these patterns, we’re entering a new, increasingly uncertain era. Turbulence in the insurance space, national and global trends, and an ever-evolving and complex risk landscape have created a challenging market, the likes of which the industry hasn’t seen in 20 years.

Concerns related to the coronavirus, cybersecurity, the opioid crisis and extreme weather patterns have created a perfect storm, and businesses are experiencing significant challenges and double-digit insurance rate increases.

Right now, it’s vital for businesses to understand their exposures and ask themselves some tough questions. What exposures can they control and manage? Are they taking the appropriate steps to reduce their risks wherever possible? Do they have the appropriate insurance coverage in place?

Above all, being proactive in loss control efforts will help businesses address the challenges of the current landscape. This article will examine some of the most significant trends impacting the middle market and ways businesses can bolster their risk management efforts in this era of uncertainty and a hardening market.

COVID-19

COVID-19 continues to have an unprecedented impact on society worldwide. In response to the pandemic, billions of people around the world were subject to some form of mandated social distancing, and many governments have issued stay-at-home orders and shut down businesses to help slow the spread of the disease. While these measures are necessary to contain COVID-19 and prevent further loss of life, they have no doubt contributed to a changing landscape for businesses and customers alike.

For middle-market businesses, COVID-19 has led to significant disruptions, and many have had to quickly adapt to the pandemic in order to stay afloat. While essential businesses such as hospitals, pharmacies, grocery stores and gas stations have remained open during the COVID-19 pandemic, other operations deemed nonessential have shut down temporarily or changed the nature of their operations.

In fact, some operations have had to transition their entire workforce to remote work. This has created new challenges in terms of workplace productivity, employee communications, workplace wellness and customer service. Businesses across the country have also seen significant disruptions to their supply chains and revenues. Disaster recovery strategies and business continuity plans are also being tested, and some operations have had to restructure or even close permanently due to COVID-19.

As it stands, the data is preliminary, and it’s difficult to quantify the long-term impact of COVID-19. However, some projections suggest that a full recovery from the pandemic will take time. Put simply, COVID-19 has had an unexpected and profound impact on daily life and business. The pandemic has also underscored the need for businesses to be resilient, find new opportunities and work with partners that are dedicated to providing sound guidance and support in these challenging times. Moving forward (and particularly for 2020), businesses will need to adapt to the realities of a new operating environment that will remain challenging.

CYBER EXPOSURES

The world is more interconnected than ever before. Organizations have seen exponential growth in recent years, using computer networks and the internet to harness data, create efficiencies and reach new markets.

While the advent of this new tech has allowed organizations to unlock their potential in unimaginable ways, it has also created new and unforeseen threats that businesses need to be aware of if they are to reduce their risk of a cyberattack. This is especially important given that cybercrime is big business, and its perpetrators include sophisticated actors, such as organized crime syndicates and nation-states.

As organizations become increasingly reliant on computer systems and data, these malicious actors have endless targets to choose from. Compounding the issue, just one cyberattack has the potential to affect organizations for years, particularly financially. In 2019 alone, there were 467,361 complaints of suspected internet crime, and reported losses from cyberattacks exceeded $3.5 billion.¹ Not surprisingly, the threat of cyberattacks is a top concern for business owners. According to Nationwide’s own 2019 survey data, 86% of business owners believe their digital risks will continue to grow in the coming years.²

Regardless of their industry, cyber threats loom large for organizations of all kinds. This is especially the case for small- and middle-market firms, which often lack the expertise or resources needed to protect themselves from advanced cyberattacks. As cyberattacks continue to evolve, it’s crucial that organizations understand their cyber exposures and take the necessary steps to protect their assets, customers and bottom line.

THE OPIOID CRISIS

According to the National Center for Health Statistics, approximately 130 people die every day from opioid-related drug overdoses.³ From an economic standpoint, the opioid epidemic cost the United States $696 billion in 2018 and more than $2.5 trillion from 2015 to 2018⁴. Many of these costs were attributed to increases in health care and substance abuse treatment costs, increases in criminal justice costs and reductions in productivity.

As it stands, the opioid epidemic has become a national crisis and is affecting employees across all industries, especially those in construction, agriculture and other sectors involving manual labor. Workers in construction, mining, hospitality and recreation have nearly twice the rates of substance use disorders when compared with national averages.⁵ According to a survey by the American Farm Bureau Federation, 74% of farmworkers reported they were directly affected by opioids, and 3 out of 4 farmers said it was easy to get a large number of opioids without a prescription.⁶

Not only does the opioid crisis put the lives of a business’s employees at risk, it can also lead to safety concerns if an employee with substance abuse issues comes to work impaired.

This is particularly concerning in safety-sensitive sectors such as manufacturing, where one misstep could endanger the lives of multiple employees.

As a result of the opioid epidemic, injury prevention, pain management and workplace safety will be continued areas of focus. Businesses need to take the appropriate steps to safeguard their workers and have them work closely with certified medical professionals who can instruct them on pain management options, including less addictive alternatives to opioids. Still, businesses must remain vigilant, as opioid abuse continues to be a pervasive issue across all industries. Firms must consider this trend and take steps to ensure that worker impairment does not contribute to increased workplace risks.

WEATHER PATTERNS AND NATURAL DISASTERS

Rapidly changing weather patterns and the increasing frequency and severity of natural disasters have profoundly affected the insurance landscape over the past decade, and the economic damages from extreme weather are significant.

In the United States, insured losses for natural disasters (excluding damage caused by extreme rainfall) reached $106 billion in 2017 and $50 billion in 2018.⁷ These disasters – hurricanes, tornadoes, hailstorms and wildfires – are unfortunately only becoming more common.

According to the Insurance Information Institute, there was an average of 520 natural catastrophes per year between 1989 and 2018. In 2019 alone, there were 820 – a nearly 58% increase from the average over the past three decades.⁷

Just one of these events has the potential for wide-ranging damage to an area and its infrastructure. Together, Hurricane Harvey and Hurricane Irma caused an estimated $290 billion in total damages, $190 billion of which was dedicated toward rebuilding costs.⁸

Given the magnitude of these losses, businesses and insurance carriers alike face an uphill battle. The truth is that weather patterns are unpredictable, and many carriers are forced to tailor insurance pricing to a policyholder’s specific risks and exposures. When it comes to commercial property insurance lines, this can lead to unfavorable pricing for firms in high-risk areas, which makes loss control efforts, such as continuity and emergency response plans, that much more important.

PREPARING FOR UNCERTAIN TIMES

Regardless of the state of the insurance market or the number of trends affecting it, businesses that take a proactive approach to risk mitigation have always been the most prepared for an unpredictable environment. In a hardening market and uncertain times, it’s even more important that organizations partner with experienced insurance agents who take a consultative approach and act as their clients’ trusted advisor.

Loss control services are particularly important in today’s climate, and businesses should work with their agents to better understand their exposures and what they can do to address them. The specific strategies companies take to manage their risks will depend largely on the industry they operate in and the exposures that are most likely to threaten their business, but there are some general steps to consider:

• Market and insurance education – Organizations should get their leadership team up to speed on market changes and the challenges they bring. Key stakeholders need to be aware of the trends impacting their insurance and ways they can reduce that impact. For additional protection against market challenges, insurance agents can provide businesses with industry-specific strategies to reduce the potential for claims.
• Identification of exposures – Businesses need to have a deep understanding of their exposures if they are to appropriately control loss. By partnering with qualified insurance professionals, businesses not only gain insight into what these different exposures are, but also how to mitigate them through risk management techniques and insurance.
• Consultative risk management – Because it’s difficult for companies to proactively address risk on their own, they should partner with insurance agents and carriers that have the expertise and loss control know-how necessary to help them address risk in meaningful ways.
• Early renewals – Starting the renewal process early can be beneficial for businesses. Not only can this help them secure affordable coverage, it also promotes early communication with their insurance agent, reducing unwelcome surprises during the underwriting process.

In challenging times, businesses need to look for agents they can trust and insurers that will be there when they need them. When it comes to securing insurance during a hard market, price matters – and so does professional service that backs the underlying insurance policy.

KEY TAKEAWAYS

1. Businesses with a proactive approach to risk mitigation will be the most prepared for a rapidly changing environment.
2. Businesses should work with their agents to understand and address their exposures.
3. In challenging times, businesses should look for agents they can trust and insurers that will be there when they need them.