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Companies are increasingly grappling with rising insurance costs. In the latest Federal Reserve Beige Book—a compendium of “qualitative information” on economic conditions from the 12 Fed districts—the topic of rising insurance prices came up several times.
According to the report, “profit margins reportedly fell in several Districts” as a result of “sharp increases in property insurance costs during the past few months” and companies “struggl[ing] to pass along cost pressures.”
Indeed, insurance prices are rising to challenging levels; the latest Commercial Lines Insurance Pricing Survey showed an aggregate second quarter bump of 6.1% YoY in the US. Rising insurance prices are one more concern for finance professionals in what has been a period of high inflation in many categories stretching back to 2021. Two experts told CFO Brew what companies might try to do to reduce insurance costs, which reflect a riskier environment for the companies offering those policies.
“Yes, commercial insurance costs are rising, but it should not be unexpected given the rising levels of risk in our world today,” Thomas Cranley, EY Americas insurance solution leader, wrote in an email to CFO Brew. In addition to broader inflation and a general increase in the cost of capital that is affecting nearly all businesses, Cranley said insurance companies are dealing with increases in risk due to weather events, cybercrime, and lawsuits against corporations.
The only bright spot for corporate policy holders, according to University of Georgia Professor Robert Hoyt, is workers’ compensation insurance, for which “premiums have remained stable or even declined in the past two years.”
Hoyt said via email that most companies are responding to price increases by “retaining more risk,” with such tactics as buying less insurance, shifting to policies with higher deductibles, and by using so-called “captive insurance”—a type of self-insurance.
Both Hoyt and Cranley identified a number of risks related to a company’s physical presence—whether real estate or commercial auto fleets—and suggested companies might be able to reduce their exposure by migrating to locations with lower risk of catastrophe, installing sensors to monitor risk conditions, and hardening structures to be better able to withstand weather events.