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Multiple factors increasing commercial insurance costs

February 14, 2024

Rising frequency and increasing severity: These two conditions affecting commercial property and business auto losses – combined with overall higher prices for goods and services – are spurring increased insurance costs for consumers and insurers.1

The supply chain issues and resulting inflation that spiked in 2021 and 2022 caused prices of lumber, steel, and other key building materials to increase dramatically. Meanwhile, chip shortages and other issues slowed production of automobile and parts supplies, leading to supply shortages.

That confluence of factors – which led to the highest inflation in 40 years – has contributed to a hard market for commercial lines insurers.2

While the rate of inflation and price increases related to many building materials has cooled considerably over the past year, building and property-related costs overall are still higher than they were just a few years ago. Total construction costs are expected to rise about 4% during 20243 – led by factors such as material costs, equipment, salaries and transport4. In addition, as costs climb, so have claims. Commercial property claims industrywide increased by 30% year-over-year in the first half of 2023, and severe weather events continued to weigh on insurers through the year.5

In commercial auto, insurers experienced a loss ratio of 72% in the first half of 2023 versus a 69% loss ratio year over year, indicating a higher incidence of losses.6 The industry also sustained $3.3 billion in auto underwriting losses in 2022 due to greater claims severity, rising repair costs, and increased medical payments.7

Insurance cost drivers

The increased cost to rebuild property and repair vehicles has contributed to a significant rise in claims costs and pressure on insurers to increase premiums. Multiple factors are contributing to this environment and leading to higher expenses for insurers and consumers. These include:

  • Extreme weather – After a record 28 billion-dollar disasters in 2023, severe weather events including thunderstorms, wildfires, heatwaves, and hurricanes have amassed more than $1 trillion in damages since 2017. The costliest event in 2023 for insurers – $14.5 billion – was the heat wave and drought that gripped the South and Midwest. Convective storms throughout the year totaled more than $50 billion in damages – the highest annual amount ever recorded.8 As the variety of events shows, catastrophic damage due to weather is not confined to coastal areas. Damages from these storms have increased demand for building supplies and labor to make repairs. Weather also has led to increased auto claims. According to Verisk, claims related to hail damage jumped 85% in 2023.
  • Increased cost of vehicle repair – By the fourth quarter of 2022, vehicle parts and labor costs increased more than 14% and 10%, respectively over the previous year.9 In 2023, vehicle repair costs had climbed 23% over 2022 – more than four times the average inflation rate.10 There also has been an increase in vehicle accidents as driving levels have rebounded to pre-2020. Traffic fatalities have climbed significantly over the past few years, with 2021 and 2022 the deadliest in more than a decade with nearly 43,000 fatalities each year – 22% higher than 2019.11
  • Building material prices – Prices have been volatile for some materials such as lumber since 2020. Large price spikes due to supply chain issues have subsided as conditions improved after the pandemic, but prices remain elevated. Overall, more than 82% of construction materials saw an average price increase of 19% since 2020. It’s projected that materials such as wood, concrete, gypsum, and insulation will see costs increase an average of 6.5% per year over the next two years.12
  • Uncertainty in global supply chain – The bottleneck of container ships at ports made headlines in 2022. While this condition has abated, there are still concerns about global trade impacting prices. Conflict around the globe and piracy targeting shipping routes in the Suez region have impacted the movement of commodities and raw materials to their markets.13

View the infographic.

Impact of inflation on insurance

Increased costs have direct impacts on commercial property and auto insurance including, but not limited to:

  • Policyholder premiums. Amid elevated loss costs, some insurers may experience poor underwriting results, which can lead to increased premium expenses and coverage restrictions. While most property policies have a provision that accounts for a small percentage of inflation, heightened repair and rebuilding costs can increase claim severity.
  • Real property. Given the historic rise in the cost of construction materials and labor, if it cost $1 million dollars to replace a business’s real property last year, it might cost $1.2 million this year. Supply chain issues can also delay repairs and result in more expensive losses overall if the ability for a business to generate revenue is impacted. To avoid being underinsured, it’s important to confirm that replacement cost coverage is part of a policy and that the replacement cost estimate is up to date.
  • Business income. Business income limits should be adequate to keep income flowing and avoid co-insurance penalties. While it’s critical to evaluate limits for real property, it’s also very important to evaluate adequate business income coverage limits and business continuity plans to help shorten any impact of loss.

Risk mitigation tips

Even with normal levels of inflation, proactive risk-management planning can lead to better business outcomes, and help drive down costs. The following steps can help manage risk and avoid out-of-pocket losses.

  • Reassess property valuations – During inflationary periods, it is especially important to review property valuations annually to ensure coverage is keeping pace with labor and supply-costs. Detailed information on the covered property’s construction can impact the valuation. This review should include real property (buildings, pavement, land, plumbing, electrical, etc.), business personal property (such as furniture, machinery, supplies, tools, etc.) and business-income limits (loss of income or profits due to covered peril). Related to business income, it’s important to note that determining the amount of coverage to be paid under future lost income can be difficult to predict, so keeping accurate records of the prior year’s income and profit is important.
  • Implement risk management and loss control programs – A business continuity plan and tailored loss control programs are important to address specific risks the business may face. This includes an action plan for catastrophic disasters and/or the likelihood of the business being shut down, with procedures for what to do before, during and after a loss.

Nationwide’s My Loss Control Services can be accessed for assistance in developing a business continuity plan along with other loss control resources to help manage risk. The following resources can be referenced to help address risks:

Loss Control Services consultants can help tailor solutions to meet specific risks faced by businesses.