Commercial Insurance Outlook: What to Expect in 2023
Many contractors are budgeting for 2023, and a significant budget item is insurance. While every business will be affected by various factors, some general conclusions can be made about the industry.
How is the industry doing now?
The insurance industry is doing okay. The combined ratio (losses and expenses divided by premiums) is forecast to be 100.7% in 2022. This is 1.2 points higher than in 2021. This means that for every $100 the industry receives, they are paying out $100.70. Fortunately, the industry is still making a profit due to investment income, but companies are not generating the returns they would like. Preferably, their combined ratio is under 95% and ideally closer to 90%. Because of the current combined ratio, most insurance companies are seeking rate increases of 5% to 10% or more. The insurance market, however, has a significant amount of surplus or available capital, which drives competition. While companies would like to raise pricing, competition serves as a moderating factor.
So, what can contractors expect in 2023?
If companies are interested in the quick answer to the budget question, assuming similar exposures (payroll, property values and revenues) and decent loss history, they should conservatively budget for a 10% rate increase. Every business, however, is different and some lines of coverage are doing better than others. Here is what contractors can expect for the specific lines listed below.
Property Insurance, in general, has been flat to plus 10%. Certain properties, however, are seeing significant increases. Anything remotely exposed to wildfire risk will see massive rate hikes. This is affecting personal and commercial lines. If a property has a high “wildfire score,” the owner probably already knows it, but if they don’t, their broker should be able to provide it. Needless to say, properties with wind-driven exposures are equally difficult to insure. Losses for these types of losses and resultant flood losses were high prior to Hurricane Ian, which recently blew through Florida. That event alone is supposed to cost the industry $50 billion-plus (some experts are estimating as high as $100 billion). Expect flood premiums to go up significantly (25% or more). Note as well that the replacement value of most properties has increased significantly due to inflation. Don’t be surprised if an insurer insists on higher replacement cost values.
General Liability Insurance is experiencing modest increases. In general, expect flat to plus 5% on rate. Like all lines, however, this can vary. Some commercial construction and life science risks may actually see decreases, while certain habitational- and hospitality-type businesses have seen double-digit increases.
Auto Insurance continues to be a challenge. Loss frequency is up substantially due to distracted driving. The cost to fix a damaged auto has also escalated. Ten years ago, if there was a rear-end accident, you replaced a bumper; today, that bumper includes cameras and sensors. Loss severity has also escalated. Social Inflation is caused by increased jury awards—and jury awards, for whatever reason, are escalating. On preferred auto schedules with good controls and a decent loss history, budget a 10% increase.
Excess (Umbrella) Insurance coverage generally follows the underlying liability and auto pricing. Unfortunately, however, excess layers have been hammered by social inflation. Underwriters are commonly increasing their pricing 25%-plus and also restricting capacity. Once again, terms can vary greatly. Auto-heavy risks will see higher pricing, as will habitational, hospitality and large retail.
Workers’ Compensation rates have been coming down for years. In 2014 the average charged rate in the State of California was $3.24. This year it is $1.74, a 46% decrease. While major increases are not anticipated in 2023, the market should not go down any further. The combined ratio for this line of business has been steadily increasing. In 2016, the combined ratio bottomed out at 79%; currently, it is at 112%. Budget base rates are expected to be up, on average, 5% this year. Other factors, like experience modification, will also affect pricing.
Executive Risk includes directors and officers (D&O) liability, employment practices and crime coverages. Experience in this area has not been great, but the market remains competitive and 5% to 10% average rate increases are expected. The exception to this is Public D&O which is seeing flat renewals and, in some cases, rate decreases of 10% or more.
Cyber Insurance has seen deteriorating loss experience. This product was for years underpriced and now rates are going up and underwriting requirements are strict. Cyber Insurance is volatile and the number of new players entering the fray makes it difficult to provide a general idea of what to expect on renewal. Cyber insurance costs will likely go up 25% to 100% or more. It is best to get an early read from a broker on a cyber program.
Professional Liability for the typical accountant, lawyer, architect or engineer remains in fairly good shape. There are a number of insurers competing for business and experience has been decent but not great. Many insurers are seeking increases of 10% or more, but as mentioned above, competition is helping to soften this and most accounts are renewing flat to plus 5%.
Every business has different exposures, business practices and loss histories, all of which will affect insurance costs. While some conclusions can be made based on a macro view of the insurance industry, the best way to budget appropriately for 2023 is to have a discussion with an insurance broker.