Why Is Commercial Insurance Getting More Expensive?

As most business owners can tell you, the cost of commercial insurance is rising. Collectively, we expect the price of everything to increase over time, but the rate of commercial insurance cost increases is higher than many expect.
Why is this the case? And is there anything that you can do about it?

What Influences the Cost of Commercial Insurance?

Let’s look at the main influencing factors that are increasing the costs of commercial insurance:

Labor shortages and secondary effects. Employers in construction and other fields with physically demanding jobs have experienced labor shortages ever since the COVID-19 pandemic. It’s harder than ever to find workers, and existing workers are beginning to age out of the profession. As a result, employers have attempted to attract more people to the profession by increasing wages and adding new benefits, which both drive up overall costs. Additionally, employers have extended their search to less experienced candidates, which increases risk and potential liability exposure. Cumulatively, these increased costs and risks influence the cost of commercial insurance.
Supply chain issues. Supply chain issues have also been a problem. Increasingly, companies are finding it difficult to source the products they need to be successful. In the construction industry, materials like lumber and steel were once abundant, but are now in very short supply. Certain products, like circuit boards, can be delayed for weeks, or even months. This adds operational costs in many different areas, distorts timelines, and creates more job-site issues, ultimately leading to higher premiums.
Higher medical costs. Anyone who’s had to visit a hospital or see a doctor can attest to the dramatic rise in medical costs that we’ve seen in recent years. The medical industry, like the construction industry, has experienced severe labor shortages, supply chain issues, and other complications that increase costs. When the cost of medical care goes up, payouts from insurance companies go up, and when payouts from insurance companies go up, insurance companies are practically forced to raise premiums.
Economic recession risks. Economists are divided on their opinions on the current state of the economy. Many have predicted an economic recession in the near-term future, and while we’ve been able to avoid this outcome for a couple of years, it’s only a matter of time before we see some kind of decline. If a recession does hit, contractors will probably take on fewer projects, reduce crew sizes, and cut spending to remain sustainable; oftentimes, this means cutting costs associated with safety, like delaying the purchase of safety equipment or foregoing certain types of safety training altogether. Increased injuries and claims that result from this can drive premiums up.
Extreme weather. Extreme weather events are becoming more commonplace. Major disasters like hurricanes, tornadoes, and wildfires introduce major repair expenses and new risks to the construction industry. In addition to increasing costs, extreme weather events present new risks on the job site, ultimately driving insurance costs higher.
Economic inflation. We’ve all experienced the effects of price inflation as they’ve manifested in the past few years. There are several root causes of this inflation, including artificially low Federal Reserve interest rates, but the bottom line is that the prices of practically everything are rising.
Social inflation. There’s also an element of social inflation pushing insurance costs higher. For example, over the last few decades, our society has become increasingly litigious, making lawsuits against businesses much more common and judgments much higher.

What Can You Do?

So what can you do about the rising costs of commercial insurance?
There isn’t much you can do to drive costs down overall, but you can carefully manage your own business to keep costs to a minimum:

Make safety a top priority. Even during hard times, safety needs to be your top priority. Provide adequate equipment and safety training to all your employees.
Improve employee retention. Do everything you can to retain the employees you have and keep them safe; it’s good for productivity, safety, and cost efficiency.
Boost recruiting. Step up your recruiting game to get more employees in the door.
Diversify your supplier base. You’ve likely heard the investment advice to diversify your portfolio; you should also diversify your supplier and vendor base to mitigate risk. This way, a single supplier issue is unlikely to disrupt your workflow.
Shop around. Always be willing to shop around with different commercial insurance providers so you can find and take advantage of the best rate.

Nobody likes the fact that commercial insurance is getting more expensive, but it’s an unnecessary downstream effect of phenomena like inflation, rising medical costs, and even labor shortages. If you’re aware of this trend, and you’re willing to take some preventative measures against it, you can keep your costs to a fair level.