Is rate relief on the way for middle market businesses?

Navigating the commercial insurance landscape can be a daunting task for middle-market businesses. While some lines of insurance have been in a “hardened” market cycle, others are more stable.

Brokerage group Hub International reported a 6.9% average increase in commercial insurance rates for middle-market businesses in the third quarter of this year, projecting rates to remain steady or even ease through the year-end.

However, it noted significant variations in rates for certain lines, such as commercial auto, general liability, property, excess/umbrella, workers’ comp and D&O, and for clients with more complex risks.

Michael Chapman (pictured right), national director of commercial markets and president of Hub’s south and central regions, spoke to Insurance Business about the key factors driving these changes and the strategies businesses can use to manage them.

“The idea of using an average is tough given the wide range of business lines in our survey,” Chapman said. “If you see rates that are flat or slightly up, it likely means they were up substantially more in previous surveys. Only a few lines have decreased, and even those declines are tapering off. We’re still seeing increases, but the speed and scope have slowed significantly.

“Previously, we were in the double digits for property, auto, general liability, and excess casualty. Now, it’s more of a market adjustment, partly due to record carrier performance and better returns.”

Which insurance lines remain volatile from a rate standpoint?

According to Chapman, the most significant areas of concern are general liability and commercial automobile insurance. These lines are still experiencing high rate increases, largely driven by external factors. In the case of general liability, the primary driver is the increase in litigation.

“In general liability, we’ve returned to fully open courthouses, and the litigation environment is back to pre-2020 levels,” he said. “It’s a highly litigious world now, and the size and scope of verdicts are driving the increases.”

The rise in large verdicts has pushed insurers to limit their capacity, which moves more risks to the excess market. “Instead of offering $100 million limits on excess umbrellas, [carriers] might offer $10 million and price accordingly,” Chapman said.

Commercial auto insurance is facing a different set of challenges. Contrary to expectations, technology advancements have not led to a decrease in accidents. Distracted driving due to cell phones and an increase in delivery vehicles, which Chapman referred to as the “Amazon effect,” are compounding the problem.

The cost of claims is also soaring due to the need for more complex parts. “I had a minor bumper issue that would’ve cost $150 twenty years ago, but now it’s $4,000 due to all the technology in the car,” Chapman said.

Risk and claims management key to favorable renewals

While some lines like general liability and auto continue to rise, others are stabilizing or even decreasing. Workers’ compensation, for example, is highly regulated, and rate changes in this area are modest.

Similarly, the directors and officers (D&O) insurance market for publicly traded companies, which saw dramatic increases in recent years, has flattened.

“The public company D&O market just went up and up and up until about 2022, and then in late 2022 and all of 2023, the market plummeted,” Chapman said. After this sharp correction, he said, rates have now leveled off.

As rates fluctuate across different lines, middle-market businesses are finding themselves at a crossroads, needing to adapt their strategies to cope with rising costs. Chapman stressed the importance of risk management and actively managing claims to position businesses for more favorable insurance renewals.

Businesses that can demonstrate they are lower-risk clients are in a better position to secure more favorable rates. Companies that proactively address their risks and demonstrate a willingness to adjust deductibles or limits are likely to see better outcomes.

“I think the million-dollar question for brokers is, where are we bringing value beyond just placing the business?” said Chapman. “That’s why we do these rate outlook reports and discuss market trends—so we can go to our customers and say, how do we make you a non-average risk?”

The key to becoming a lower-risk client lies in three main strategies: driving a risk management-focused culture, managing claims effectively, and being flexible with coverage structures.

“How willing are [clients] to drive a risk management-focused culture [in their organization]?” Chapman said.

What should middle-market clients know ahead of renewal season?

Supply chain risk is another area where businesses need to focus their attention. Business interruption claims have been rising as the time it takes to source replacement parts or machinery has lengthened significantly. Companies need to be aware of these risks and take steps to diversify their supply chains, ensuring they are not dependent on a single supplier for critical components.

In addition to these internal strategies, middle-market clients also need to be aware of the broader market factors influencing insurance rates. Chapman pointed to the volatility in the reinsurance market, where carriers are becoming more selective about the risks they take on.

“You’re not going to see huge limits on single property risks or massive fleet coverages,” Chapman said. “Underwriting scrutiny is much higher now, and they’re looking to insure clients with solid risk management in place.”

Are you a broker serving the middle-market space? What are your thoughts on this outlook? Please share your comments below.