Business insurers are perhaps the most underappreciated partner a business operator has, but when leveraged to the fullest extent, they can be as valuable as accountants, attorneys, and bankers. Much like these other partners, their value comes when heading off trouble with sound, preventive practices that the insurance underwriting process can help implement.
There could be plenty of trouble on the horizon with cybercrime on the rise and a possible economic recession staring at us in the second half of 2023 or the first half of 2024. The New York Fed has a recession probability indicator that suggests there is a 68.2% chance of a U.S. recession sometime in the next 12 months, the highest reading in more than four decades.
To help you prepare for a recession using business insurance as a buffer, we spoke to insurance executives Bill Julius, executive vice president of sales for McClone Insurance; Dana Hellenbrand, director of manufacturing and distribution for M3 Insurance; and Bill Nagy, a risk management consultant with Hausmann Group.
Our industry experts identified several trends — continuing and emerging — for business operators to consider as they make coverage decisions.
Trend 1: Hard markets
After decades of stable softening, where rates were flat or decreasing and coverages were readily available, most property-casualty lines are experiencing rate hardening, where rates are consistently rising and coverage is harder to find — a trend that will continue for the foreseeable future. Thanks to a variety of factors, including catastrophe-exposed accounts following Hurricane Ian, which caused more than $112 billion in damage, making it the third-costliest weather event in U.S. history, buyers of commercial property insurance can expect additional rate hikes this year, according to Business Insurance, a publication tailored to executives who are responsible for the purchase of corporate insurance or self-insurance programs. For example, the publication reported that property catastrophe reinsurance rates jumped between 45% and 100% at the time of Jan. 1, 2023 renewals.
Moreover, the fourth quarter of 2022 was the 20th consecutive quarter of increasing rates, based on data from Aon PLC, a London-based professional services and management consulting firm. Such a lengthy period of sustained rate increases has never happened before, and with no end in sight, the ongoing rate hardening will require creativity around how business operators mitigate risk, who they partner with, and what kind of retentions (dollar thresholds) they take to offset the current rate environment.
“Some of that will be ongoing for a period of time, so I don’t see us coming out of this soon,” Julius says.
There is a lot more pressure on the property market and on umbrella policies that provide extra layers of liability protection. According to Nagy, there are still some serious supply chain issues that increase the cost of building materials and the cost of doing business in general. In a hard market where premiums increase and coverages and capacity decrease, underwriting gets stricter, the capacity for insurance carriers decreases, the reinsurance market gets tougher, and things cost more. “When you look at the insurance marketplace from a property standpoint, the rates from a hard insurance market have been increasing, but with that, the replacement cost valuations continue to rise as well,” Nagy says. “So, it’s a unique deal where there are supply chain issues, it’s tougher to build buildings, and it costs more.
“On top of that, rates are increasing as well, so there are significant challenges with that alone,” Nagy adds. “I also think it’s fairly unique being that we’re in a hard insurance market with all these challenges that are continuing to impact businesses.”
As the property market continues to see increases in premiums, the factors influencing the property market are increasing property values due to rising construction costs. In addition to inflation, the increasing frequency of natural disasters such as hurricanes, wildfires, floods, and tornadoes has caused reinsurance carriers to take significant price increases, “which then push down through premium increases to our customers,” states Hellenbrand.
In Madison, it doesn’t appear to be affecting the brisk pace of commercial construction, as the multifamily building boom continues due to population growth. “It hasn’t stopped,” Hellenbrand states, “but companies are evaluating their expenses between the cost of money with inflation plus the cost of insurance and the cost to build.”
Meanwhile, capacity from insurance companies for certain risks and high-hazard properties has decreased, she adds.
“Think [in terms of] large concentration of values at one location. High-hazard operations that are susceptible to fire without proper sprinkler protection, or if they’re not near a fire department, their insurance costs have been impacted more than others who have more favorable property exposures. We’re helping customers combat the increased premiums by offering higher deductible options and also transferring some risks to captive [insurance] strategies.”
Trend 2: Cyber instability
Another trend that was influenced by the pandemic is a change in the cyber insurance market. The expectations for an organization’s internal systems and procedures are far different than they were just three years ago, and there has been a great deal of push back on limits, which has increased pricing. “Two or three years ago, the trend was that the claims were three times the premiums collected in cyber, so they’ve got a lot of ground to make up in terms of sustainability,” Julius says. “For some time, it would make sense that cyber would be more expensive than property. The average cyber claim is between $400,000 and $500,000. The average property claim is $19,000.”
The impact on companies is difficult because when you’re insuring buildings, that’s property that people can see, but cyber insurance protects the organization from ransomware and other threats that are more intangible in nature. “It’s hard for companies to stomach huge increases for intangible coverage versus the traditional property coverage,” Julius notes.
Prior to the pandemic, Nagy says the industry didn’t necessarily know how to price cyber insurance products or how to evolve some of the necessary coverages. The stakes are higher now, especially with estimates that over half of businesses had some type of cybersecurity event within the last year, whether that resulted in some type of insurance claim or just internal stress. “It went from zero to 100 when you looked at the rates, but also the underwriting and the quality control measures that were required to even place insurance,” Nagy explains. “So, businesses have done a really good job putting in some of those quality control measures that are necessary to catch stuff on the front end, as opposed to just using an insurance mechanism as a catchall.”
Business operators must continue to invest in front-end protections because with predictions of Orwellian misuse, AI might pour more gasoline on the cyber fire even if there are benefits elsewhere. “If you’re in transportation, people have been talking about it for years with driverless cars or fleets and the efficiency and how safe driving could be made,” Nagy notes. “Yes, it could potentially drive down auto liability exposure, but that risk could potentially be transferred to the cyber risk. There’s an evolution with it, and it will be interesting to see how the insurance marketplace views that and how it’s priced, but there’s definitely a continuing exposure that is growing.”
Hellenbrand notes that insurers had seen cyber insurance premiums begin to level off due to fewer losses in 2022 compared to prior terms, but in the first quarter of 2023, they started to see an uptick in ransomware events over the final quarter of 2022. She cites loopholes in the configurations of multifactor authentication, which allowed threat actors to gain access to computer systems. “Many companies have done a great job over the last two years of working on their risk management to protect them from cybercrime by upgrading their systems,” she states. “They have to continue to invest to keep the criminals at bay.”
If they haven’t made these investments, cyber insurance either will be costlier or the lack of preventive investment will be a barrier to entry, which means “they might not even be able to purchase it,” Hellenbrand adds.
There are different ways to purchase the coverage. One is an add-on to an existing liability policy; another is a monoline policy. M3 recommends the purchase of a monoline cyber insurance policy from a company that specializes in the program because it offers quick access to relevant services at the time of a cyber event. “It will provide you a cyber breach coach, an incident response firm in addition to media or PR [public relations] help, and all of the vendors will have been vetted out by the insurance company to help you immediately when you have a claim,” Hellenbrand notes. “The first 24 hours after an event are crucial, so it’s important to have a good partner to rely on.”
If you have a breach event, it gets expensive just for the investigation into what actually happened. However, sometimes the bad actor didn’t actually get access or produce a specific event bad enough to announce it or disclose it. “In order to figure out how they got into the system, you still have to bring in forensics to investigate,” Hellenbrand says. “Your cyber program will pay for all of those things.”
Trend 3: Nuclear verdicts
In addition to a spate of costly natural disasters, there have been “a ton” of catastrophic incidents involving high jury awards, Nagy notes, and that impacts multiple lines of insurance. The costliest jury award in 2022 was the $7.3 billion (later reduced to $1.15 billion) Charter Communications was ordered to pay the family of an elderly woman murdered in her home by a Spectrum cable technician, and two other verdicts crossed the billion-dollar threshold. The so-called “nuclear verdicts” of $10 million or more are becoming more common, and when designing a risk-management insurance program that fits an organization’s risk tolerance, the punitive cost of litigation becomes a critical factor.
Says Nagy, “If you gear it toward some of the other lines of coverage that may affect some of the local businesses here, you talk about the management liability, employment practices liability, directors and officers, and some of the nuclear verdicts and how they’re being litigated, that’s impacted a lot of businesses.”
In addition, Hellenbrand cites an increase in claims litigation around privacy. “More states are invoking privacy laws,” she states, “and we are seeing claims against companies, especially ones that are doing business in Illinois.”
Trend 4: Recessionary reserves
With the Federal Reserve raising interest rates to slow the economy and tame inflation, business operators should start thinking about protective recession insurance — one that helps with cash-flow management when business-to-business customers fall behind on their bills. One type of coverage is trade credit insurance. It’s not a new concept, Hellenbrand notes, but on those occasions when a recession hits, it provides coverage for a company’s exposure to accounts receivables.
“Say they offer 30-, 60-, or 90-day terms, and a customer doesn’t pay, and they go bankrupt. The insurance policy would then reimburse you and go back after the company instead of you having to expend your resources to chase them, and/or not get paid,” Hellenbrand explains. “It also gives a proactive risk management strategy to assist in helping the business decide if it’s prudent to extend credit to a new potential customer of theirs.”
Trade credit insurance also improves a buyer’s opportunity to borrow money because its accounts receivables are protected. The alternative is “looking at it as a liability to the business when they’re working with their bank,” Hellenbrand adds.
Partnering policy
The COVID-19 pandemic brought harmful impacts to business insurance, and information technology presents both operational benefits and future concern. Industry professionals are more sanguine about the operational benefits of technology such as artificial intelligence, blockchain, and the internet of things than certain purveyors of doom, which have devoted newsprint to the possibility of disaster.
That’s because the ease of doing business is not only aided by constantly evolving software applications that improve internal operations, but also by AI and blockchain technology that improve claims handling, and big data that streamlines underwriting. “Some people see that [AI] as being a threat, a threat to the broker community, and a threat to what we provide, but given that the new norm today is a different rate pressure in a number of lines of coverage, we’re not seeing that,” Julius says.
“The value that we bring to be able to solve problems and leverage situations for our clients is at an all-time high, and so from my perspective, AI is only a benefit to helping us get better in certain areas of the process,” Julius adds. “It’s certainly not reducing the need for our services relative to navigating market conditions today for our clients.”
With these capabilities, an insurer can provide basic services such a coverage checkup, and there are opportunities to advise clients on cost-reduction strategies, cyber risk assessments, and other services. According to Julius, however, it’s an underappreciated aspect of business insurance because the industry as a whole doesn’t do it very well. “We do the blocking and tackling and tackling of insurance, and that’s what we were founded on,” he states. “The companies that are thriving today are organizations that understand the value of being a true advisor or true consultant partner just like the CPA firms and banks.”
