Like many other sectors of the economy, the commercial insurance industry experienced changes to both its market cycles and operating procedures in the last 12 months. Specifically, hard market conditions somewhat started to ease, a contrast from recent years. This stabilization became especially evident in the second half of 2022, highlighted by decelerated pricing and expanded capacity within several coverage segments. While this shift certainly represents an improving insurance landscape, industry experts have asserted that ongoing headwinds facing certain lines of coverage have continued to generate hardened conditions overall.
With this in mind, the commercial insurance space will likely remain challenging in 2023, although it may present more favorable conditions than it has in prior years for some insurance buyers. In any case, it’s essential for businesses to be aware of the latest market developments and work with trusted insurance professionals to adjust their risk management practices and coverage solutions accordingly. Here’s an overview of market trends to watch in 2023.
The last few years have seen widespread labor shortages. According to a recent survey conducted by financial services company Provident Bank, 75% of businesses have been affected by current worker shortages. Several factors have contributed to these shortages. Primarily, the lasting ramifications of the COVID-19 pandemic caused many workers to permanently alter their job expectations and priorities, making them more willing to leave their positions in search of better opportunities and placing new demands on employers (e.g., providing greater work-life balance, higher pay, more expansive benefits, flexible hours and remote capabilities). As a result, economists expect labor shortages to continue throughout 2023 and beyond —impacting businesses for the foreseeable future. Moving forward, businesses will need to remain innovative in meeting their employees’ shifting expectations and attracting talent.
Supply Chain Disruptions
Continued pandemic-related challenges, international disruptions (e.g., congestion at global ports), rising fuel and energy costs, extreme weather events, and an ongoing shortage of warehouse workers and truck drivers have slowed shipment and delivery times for a wide range of high-demand goods—thus creating supply chain issues for businesses across industry lines. A recent survey conducted by international software company SAP found that at least half of business leaders have experienced financial impacts stemming from supply chain disruptions since the start of the pandemic. Some economic experts believe these supply chain issues will continue into the summer of 2023 before subsiding. As such, businesses should prepare for supply chain disruptions in the months ahead. Potential solutions may include adopting new supply chain technology, introducing updated contingency plans, prioritizing domestic supply chain offerings, and searching for more eco-friendly options.
Over the past few years, labor shortages and supply chain issues have largely contributed to rising inflation concerns in the commercial insurance space. Yet, 2022 was a particularly troubling year for inflation, as evidenced by a surging consumer price index (CPI). According to data from the U.S. Bureau of Labor Statistics, the CPI for all urban consumers reached a 40-year high in June 2022 and remained near record-setting levels for several months afterward. Altogether, the elevated CPI has driven up claim costs for multiple lines of commercial coverage, therefore inflating total loss expenses. To help curb inflation concerns, the Federal Reserve (Fed) has steadily been hiking up interest rates. Moving into 2023, economic analysts predict that the Fed’s efforts will eventually pay off, with inflation slowly subsiding throughout the year.
Some economic experts have forecast that rising interest rates and prolonged labor market challenges could lead to a recession in the United States in the near future. Amid a recession, businesses usually experience decreased sales and profits, limited credit capabilities, and reduced overall cash flow, thus threatening their financial stability. A recent survey conducted by global professional services network KPMG found that the majority (86%) of business executives fear a recession will take place in the next 12 months. Fortunately, more than 75% of executives confirmed their businesses already have measures in place to reduce the impacts of a recession. These measures may include establishing concrete financial plans to maintain profits; scaling back certain operations, promoting steady cash flow with shorter payment terms for customers; ensuring proper debt management; fostering strong connections with stakeholders; leveraging effective marketing strategies; and maintaining ample insurance coverage.
Social Inflation Concerns
Social inflation refers to societal trends that influence the ever-rising costs of insurance claims above the overall inflation rate. Current drivers of social inflation include continued growth in third-party litigation funding, ongoing modifications of tort reforms, and the rise of anti-corporate culture. Amid these trends, stakeholders have become increasingly motivated to hold businesses of all sizes and sectors to higher standards and demand accountability for their potential wrongdoings, prompting additional litigation and subsequent insurance claims. Compounding concerns, there’s a growing public perception that businesses—particularly large ones—can afford the cost of any damages. Nuclear verdicts (jury awards exceeding $10 million) have become more common in the current environment, posing potential underinsurance issues for impacted businesses. In light of social inflation concerns, it has become all the more vital for businesses to uphold responsible operations and ensure transparency with stakeholders.
Extreme Weather Events
Extreme weather events—such as hurricanes, tornadoes, hailstorms, and wildfires—continue to make headlines as they become increasingly devastating and costly. Making matters worse, these events aren’t limited to one geographic area, impacting businesses across the United States. According to industry data, natural disasters cost the global economy $227 billion in 2022, with under half of those expenses ($99 billion) covered by insurers. This marks the third consecutive year in which natural disaster losses exceeded $100 billion. Breaking down this number, the National Centers for Environmental Information recorded 15 separate weather and climate events with losses exceeding $1 billion across the country in 2022. Many weather experts believe such events are the new norm. Looking ahead, businesses can expect to encounter additional emphasis
on weather readiness from insurers.
This past year saw the emergence of severe international disruptions, particularly those relating to the ongoing Russia-Ukraine conflict. These geopolitical events have prompted new tari s, export restrictions, economic sanctions, and a subsequent rise in fuel and energy costs in many countries. Such events have also led to heightened security concerns, including those related to nation-state cyber threats. Considering these developments, it’s no surprise that the latest industry research revealed more than one-fifth (21%) of businesses named war and terror as their top risk in 2022, up from 15% in 2021. As these events continue, businesses should prepare for potential disruptions and find ways to cut transportation costs by prioritizing fuel e ciency across their fleets, closely monitoring evolving global trade policies, and considering domestic production solutions to remain fully operational. Additionally, businesses should consider adopting risk management solutions aimed at protecting against possible cyber warfare losses.
For businesses to successfully navigate this evolving market, it’s crucial that they consult trusted insurance professionals who understand their unique exposures, fully comprehend their industry-specific needs, provide targeted loss control solutions, and advocate on their behalf in conversations with insurers. Remember, during these challenging times, we are here to provide much-needed insurance guidance and market expertise.
For more information, contact us today.
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