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Commercial Insurance Trends to Watch in 2024

Insurance experts often examine how outside trends, reforms and movements in the larger economy affect the insurance marketplace, and businesses should follow suit to determine what factors may impact their coverage. For 2024, there are a host of sweeping market developments to consider.

Social Inflation
Social inflation refers to societal trends that influence the ever-rising costs of insurance claims and lawsuits above the general economic inflation rate. According to the National Association of Insurance Commissioners, the “social” aspect of this term represents shifting social and cultural attitudes regarding who is responsible for absorbing risk (i.e., the insurer or the plaintiff). As the commercial insurance sector shifts, it’s essential to understand what’s currently driving social inflation.

TPLF
One of the factors driving social inflation has to do with third-party litigation funding (TPLF). Such funding refers to when a third party provides financing for a lawsuit. In exchange, the third party receives a portion of the settlement. In the past, the steep cost of attorney fees would often discourage plaintiffs from taking a lawsuit to trial. But, through TPLF, most or all of the costs associated with litigation are covered by a third party, which has increased the volume of cases being pursued. Not only is TPLF becoming more common, but it also increases the cost of litigation, sometimes to seven figures. This is because plaintiffs can take cases further and seek larger settlements.

Tort Reform
Tort reform refers to laws that are designed to reduce litigation. In particular, tort reforms are used to prevent frivolous lawsuits and preserve laws that prevent abusive practices against businesses. Many states have enacted tort reforms over the last several decades, leading to fewer claims and caps on punitive damages; for example, 2023 saw Florida Gov. Ron DeSantis sign a tort reform bill into law in an effort to curb predatory litigation practices, limit personal injury lawsuits and minimize attorneys’ fees. However, some states have modified or challenged tort reforms as unconstitutional. Opponents believe tort reforms lower settlements to the point where attorneys are less likely to take on new cases and help victims get justice for their injuries or other damages. Further complicating matters, tort reform is subject to uncertainty, as it’s largely tied to political leanings and the interests of individual states. Should tort reform continue to erode, there could be fewer restrictions on punitive and noneconomic damages, statutes of limitations and contingency fees, all of which can drive up the cost of claims and exacerbate social inflation.

Plaintiff-friendly Legal Decisions and Large Jury Awards
The overall public sentiment toward large businesses and corporations is deteriorating, and anti-corporate culture is more prevalent than ever. A number of factors are contributing to this increasing distrust, including the highly publicized issues related to the mishandling of personal data and social campaigns. This has considerably impacted how a jury perceives businesses in court, and organizations are held to a higher standard for issues related to how they conduct their business. In fact, juries are increasingly likely to sympathize with plaintiffs, especially if a business’s reputation has been tarnished in some way in the past. As a result, plaintiff attorneys are likely to play to a jury’s emotions rather than the facts of the case.

Compounding this issue, there’s an increasing public perception that businesses—particularly large ones—can afford the cost of any damages. This means juries are likely to have fewer reservations when it comes to awarding damages. In the current environment, nuclear verdicts (jury awards of $10 million or more) have become more common.

Extreme Weather Events
Extreme weather events, such as hurricanes, tornadoes, hailstorms and wildfires, continue to make headlines as they become increasingly devastating and costly. What’s worse, these events aren’t limited to one geographic area, impacting businesses across the United States.

According to data from the National Oceanic and Atmospheric Administration (NOAA), 2023 kicked off with severe cold waves and immense snowfall in several Northeastern states, producing the most frigid wind chill (-108 degrees Fahrenheit) the country has ever recorded and costing $1.8 billion in losses. Between spring and early summer, a series of hailstorms, heavy winds and hundreds of tornadoes wreaked havoc on multiple Southeastern, Central and Midwestern states, leading to almost 100 fatalities and causing over $35 billion in losses. In the summer, more than one-third (34.3%) of the country experienced prolonged droughts and heat waves, resulting in widespread crop damage, reduced river

commerce and diminished national water quality; these conditions also generated $4.5 billion in losses and contributed to 138 fatalities. Throughout the year, record-high rainfall and flash flooding across states such as California, Illinois, Kentucky, Vermont and New York damaged hundreds of properties, costing more than $6 billion in losses and causing over 30 fatalities. During the 2023 Atlantic hurricane season, at least 18 named storms produced more than $30 billion in losses, leading to over a dozen fatalities.

Some of the most devastating weather events from this past year were Tropical Storm Hilary and Hurricane Idalia. Between Aug. 16-19, the NOAA confirmed that a Category 4 hurricane with sustained winds of 145 mph rapidly formed and intensified near Mexico’s West Coast before weakening into a tropical storm as it approached the United States. From Aug. 20-22, Tropical Storm Hilary became the first of its kind to enter California since 1997, bringing record-setting rainfall, flooded roads, downed trees and mudslides to the Southern part of the state. A few days later, the NOAA reported that Hurricane Idalia struck the Big Bend region of Florida as a Category 3 hurricane with sustained winds of 125 mph, making it the strongest hurricane to hit the area in over a century. From Aug. 29-31, this hurricane produced 2-8 feet of storm surges and 5-10 inches of rainfall across portions of Florida, Georgia and the Carolinas.

In addition to the devastation from these large-scale disasters, losses that occur as aftereffects of major storms or arise from small- to mid-sized weather events (also known as secondary perils) have been on the rise. For instance, the NOAA confirmed that a series of thunderstorms that produced thousands of lightning strikes in Alaska this past summer ended up spawning dozens of wildfires and burning thousands of acres across the state, causing considerable damage. Further, the NOAA reported that heavy winds stemming from the remnants of Hurricane Dora over the Pacific Ocean played a significant role in fueling the Hawaii firestorm, which went on to generate $5.6 billion in losses, claim 97 lives and ultimately become the deadliest fire in national history. Altogether, the latest industry data revealed that costs incurred from secondary perils have grown by 6.9% above the normal inflation rate each year since 2000, with average annual losses totaling $70 billion throughout the past decade.

Many weather experts believe severe storms, extreme temperatures, wildfires and flooding are the new norm. As these catastrophes become more frequent, the insurance industry will need to adopt innovative solutions to keep up with weather-related losses. Moving forward, businesses can expect to encounter additional emphasis on weather readiness from carriers.

Economic Pressures
Surging inflation has been a persistent concern in the commercial insurance space over the last few years, resulting in eroding investment income and higher administrative costs among carriers, greater underwriting uncertainty, increased claim expenses and rising premiums. Such inflation reached a peak in 2022, evidenced by the highest consumer price index (CPI) in 40 years. According to the U.S. Bureau of Labor Statistics (BLS), the CPI for all urban consumers jumped by 9.1% year over year in June 2022 and remained near record-setting levels (7%-8%) for the next several months. Although the CPI has cooled throughout 2023, it’s still elevated; BLS data confirmed that it increased by 3% year over year in June 2023 before rising even further by 3.7% year over year in September 2023. As a whole, the increased CPI has driven up costs across several lines of commercial coverage, therefore inflating overall loss expenses within the property and casualty markets.

In the property insurance space, the costs to repair, replace or rebuild structures and their contents following losses have increased, prompted by rising labor and material expenses. In fact, BLS data revealed year-over-year increases in the CPI for a number of building- and construction-related elements in September 2023, including property furnishings and supplies (0.9%), tools and hardware (4.2%), and overall shelter costs (7.2%). In the auto insurance market, vehicle repair expenses and subsequent accident costs have also increased, brought on by supply chain disruptions for several critical vehicle parts (and vehicles overall). These concerns were reflected in a rising year-over-year CPI in September 2023 for new cars (2.5%) and motor vehicle maintenance and repairs (10.2%), according to BLS data.

The workers’ compensation and liability insurance segments are also being affected by other forms of inflation, such as medical and wage inflation. Medical inflation refers to increasing prices for health care necessities; such inflation plays a major role in accident costs and related liability claims. BLS data confirmed that the CPI rose by 4.2%, 2.2% and 7.6% in September 2023 for medical care commodities, prescription drugs, and medical equipment and supplies, respectively. Considering these increases, medical inflation is likely to continue affecting expenses in the liability insurance space for the foreseeable future. Wage inflation, on the other hand, refers to workers’ rising salaries. Amid labor market challenges, some businesses have responded by boosting their workers’ pay, contributing to wage inflation. According to research from employment website Indeed, wage inflation peaked in 2022 at 9.3% but remained above 4% through 2023. Because payroll is leveraged as an exposure base to calculate workers’ compensation premiums, wage inflation could prompt increased rates in this space. Further, this form of inflation may increase the risk of payroll miscalculations and create short-term disconnects between wages, benefits and workers’ compensation premiums. Most states have an index for wage inflation to ensure premiums and benefits match one other, but errors can occur.

To help curb overall inflation concerns, the Federal Reserve (Fed) steadily hiked up interest rates between 2022 and 2023. While financial experts initially feared that these increased rates would lead to a potential recession—a prolonged and pervasive reduction in economic activity—across the United States, those fears began to subside by the middle of 2023; however, financial pressures on businesses may persist. Specifically, if the Fed’s continued efforts to curb inflation trigger an economic downturn, it may decrease companies’ sales and profits, limit their credit capabilities and reduce their overall cash flow as customers take more time to pay for products and services. This means that businesses without substantial revenues, excess reserves and the additional capital necessary to offset extended periods of loss are more likely to make difficult financial decisions to avoid insolvency or bankruptcy. As such, it’s best for businesses to have adequate risk management measures in place. 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 and leveraging effective marketing strategies. Above all, it’s crucial for businesses to maintain sufficient insurance coverage in a down economy and secure financial protection against possible losses, as certain commercial exposures tend to rise during such a downturn.

Going forward, financial experts predict that overall inflation trends will likely hold steady, possibly remaining above 2% through 2025. Consequently, carriers may continue to face inflation-related challenges as it pertains to maintaining coverage pricing to keep up with more volatile loss trends, thus impacting businesses and their total insurance expenses. Yet, it’s worth noting that the insurance industry as a whole is better positioned to incur losses to its reserves than it was in previous periods of prolonged inflation in U.S. history (i.e., the 1980s).

Supply Chain Disruptions
Dating back to the beginning of the pandemic, the United States and much of the world have faced supply chain disruptions. Most of these issues stemmed from increased demand for various items and materials amid a slowdown in production and a subsequent lack of availability during pandemic-related closures. Even though businesses have since resumed their normal operations and increased production levels, demand for certain items and materials continues to outweigh inventory. Creating further supply chain bottlenecks, various international events (e.g., global port delays and geopolitical conflicts), extreme weather conditions, and an ongoing shortage of warehouse workers and truck drivers have slowed shipment and delivery times for some high-demand goods.

These supply chain disruptions have impacted businesses of all sizes and sectors. According to a recent survey conducted by media company CNBC, 61% of businesses reported that their current supply chains still aren’t functioning normally, with many of these companies placing orders for essential inventory and materials up to six months in advance to ensure timely deliveries and avoid operational delays. As it stands, the latest research from warehousing technology company GreyOrange found that some of the most significant supply chain pain points facing companies include navigating material price increases due to inflationary pressures, sourcing stock and ensuring the integrity of supply chain data.

Supply chain issues are also impacting companies’ recovery capabilities following insured losses, resulting in prolonged claims processes and substantial business interruptions. Especially in the commercial property insurance space, supply chain challenges related to building materials are forcing businesses to keep their doors closed for extended periods until they get the construction resources needed to repair or replace their affected structures. This, in turn, has drawn out some companies’ indemnity periods, which refers to the time spent restoring business operations after insured losses take place. Longer indemnity periods not only generate lengthier (and often costlier) claims but can also lead to higher restoration expenses, diminished productivity, lowered staff morale, reputational damage and reduced customer retention, all of which can threaten companies’ overall financial health and success. When faced with extended indemnity periods, businesses may also be more susceptible to coverage gaps and rising premiums.

Compounding concerns, the CNBC survey found that less than one-third (30%) of businesses think supply chain challenges will subside in 2024, while 22% are unsure when these difficulties will dissipate, and 29% believe such struggles will last into 2025 and beyond. With these numbers in mind, it’s vital for businesses across industry lines to prepare for and minimize potential supply chain disruptions in the months and years ahead. One emerging tactic is the utilization of automated supply chain technology and other digital solutions. According to the GreyOrange report, more than half (52%) of businesses have increased their overall budgets for supply chain technology in the last 12 months; these companies’ top investment priorities include achieving more accurate stock levels (32%) and leveraging data analytics to maintain real-time supply chain visibility (38%). Additional steps businesses can take include introducing updated contingency plans, forging strong partnerships with multiple vendors, prioritizing domestic supply chain solutions over international counterparts, staying informed on the latest inventory and stock trends, and searching for more environmentally friendly options. Implementing such measures could make all the difference in remaining operational amid possible disruptions.

AI Developments
AI technology, which has surged in popularity in recent years, encompasses machines and devices that can simulate human intelligence processes. Applications of this technology are widespread, but some of the most common include computer vision solutions (e.g., drones), natural language processing systems (e.g., chatbots), and predictive and prescriptive analytics engines (e.g., mobile applications). According to the International Data Corporation, the market for AI technology and other cognitive solutions is projected to exceed $60 billion by 2025, up from $1 billion in 2015. In light of this growth, it’s imperative for businesses to understand the benefits and ramifications of such technology.

AI systems can potentially improve loss control measures and claims management practices for several lines of commercial coverage. For example, this technology can be utilized as a valuable safety tool to help mitigate workers’ compensation exposures and associated losses by way of providing prompt diagnoses when employees get injured on the job, generating customized treatment plans to improve recovery outcomes, selecting ideal health care providers, detecting injury patterns and anomalies, determining fundamental causes of workplace incidents and suggesting methods to prevent future losses, and reducing overall claim complexity. In addition, AI tools can help companies boost operational efficiencies through automated workflows, promote greater decision-making capabilities with predictive insights and conduct more effective due diligence processes in the boardroom. This technology could, in turn, reduce companies’ corporate exposures and related liability concerns. Further, carriers across coverage segments can leverage this technology to detect insurance fraud, assess policyholders’ unique risks and provide 24/7 assistance throughout claims processes.

Nonetheless, AI technology also carries risks for the commercial insurance space. In particular, since this technology still relies on human algorithms, any inaccuracies or mistakes made during the initial input process could perpetuate companywide biases and produce serious errors amid corporate decisions, exposing businesses to various lawsuits and related claims. In fact, the U.S. Equal Employment Opportunity Commission (EEOC) recently released detailed guidance for businesses regarding AI-related biases and errors in the workplace, with 2023 witnessing the agency’s first settlement for an AI-based lawsuit. Using this technology in certain organizational settings may also pose ethical concerns regarding data privacy and protection. What’s more, federal and state legislation surrounding AI technology is frequently changing, which means that companies that neglect to ensure compliance with applicable laws could face substantial legal penalties. Lastly, cybercriminals have increasingly weaponized AI technology, exacerbating cyber losses and related claims among businesses. Primarily, cybercriminals can utilize this technology to carry out harmful activities (e.g., launching malware and social engineering scams, cracking passwords, finding software vulnerabilities and reviewing stolen data) at a rapid pace and with greater success rates, allowing them to cause major damage and even evade detection. Considering these issues, it’s best for businesses to carefully review the pros and cons of AI technology and establish adequate risk management techniques before implementing such solutions within their operations.

Geopolitical Upheaval
This past year saw the continuation of severe geopolitical upheaval and international disruptions, particularly those relating to the ongoing Russia-Ukraine conflict, shifting trade dynamics between China and the United States, rising tensions amid the Israel-Hamas war and growing nation-state cyberthreats. These global events have had far-reaching impacts, prompting new tariffs, export restrictions, economic sanctions and coverage exclusions. Further, such events have exacerbated existing technological challenges, inventory backlogs, material shortages and supply chain issues. According to a recent survey

conducted by Oxford Economics, more than one-third (36%) of businesses currently view geopolitical tensions as one of the top risks facing the global economy. As these events continue, companies should prepare for potential disruptions by closely monitoring evolving global trade policies and considering domestic production solutions (e.g., switching from an international vendor or raw material to a U.S. alternative) to ensure business continuity.

One of the most significant concerns associated with geopolitical upheaval is the extent to which losses stemming from international disruptions are covered by commercial insurance policies, especially as it pertains to instances of war; for example, war exclusions are common for both commercial property and cyber coverage. Regarding cyberwarfare, research from technology company Microsoft found that nation-state cyberattacks targeting critical infrastructure have jumped by 20% since 2021. Yet, securing adequate coverage for related damages has proven challenging due to war exclusions. Although these exclusions are fact-specific and often vary between policies and carriers, they generally state that damages from “hostile or warlike actions” by a nation-state or its agents won’t receive coverage. Such exclusions were created to help protect carriers against potentially systemic losses that may arise amid attacks by governments, their militaries or associated groups.

To reduce any ambiguity on protection for nation-state cyberattacks, certain insurance marketplaces and carriers have recently revised their policy language surrounding war exclusions, thus providing more clear and consistent guidelines for what is and isn’t covered. Some carriers have also become more apprehensive in selecting policyholders, adopted extensive application processes and introduced additional cybersecurity documentation requirements as a prerequisite for coverage. Looking ahead, it’s essential for carriers and insureds to openly communicate about policy definitions and specific coverage capabilities regarding cyberwarfare. Such communication will help ensure both parties are on the same page, minimizing potential issues when claims arise. Furthermore, businesses should take a proactive approach to mitigating possible nation-state cyberthreats by implementing effective loss control measures (e.g., conducting risk assessments and reviewing digital supply chain exposures, addressing foreign attackers in cyber incident response plans, leveraging proper security software and following applicable government guidance).

Reinsurance Challenges
Reinsurance refers to an agreement made to help insurance carriers transfer their risk to a third party. It consists of a contract between a reinsurer and an insurance carrier—also called a primary insurer—that permits the carrier to transfer some of the financial exposures associated with issuing insurance policies to the reinsurer. The reinsurance sector plays a valuable role in the overall insurance landscape, allowing carriers to effectively allocate their risks and offer more capacity. In recent years, however, the reinsurance segment has faced substantial challenges. Specifically, increasing market demand and large-scale losses have forced reinsurers to make significant payouts, threatening their overall profitability and generating hardened conditions across several lines of coverage. Consequently, many primary insurers have seen their reinsurance costs increase over the last few years.

The commercial property reinsurance space has been hit the hardest by these trends, largely due to the increased frequency and severity of extreme weather events and associated CAT losses. In response, industry data confirmed that many primary insurers in this segment (especially those with elevated CAT exposures) have seen their reinsurance premiums nearly double in price throughout 2023, with some also facing lower capacity. From there, these conditions have contributed to primary insurers increasing rates and limiting capacity for their commercial property insureds, highlighting the trickle-down effect of reinsurance challenges.

Going into 2024, analysts from Fitch Ratings predict that reinsurers will start to see their profits rebound following the past year’s premium hikes, increasing the likelihood that primary insurers will experience rate deceleration. This is especially true in the liability reinsurance space, where rates have the potential to flatten amid increased market competition. While commercial property reinsurance premiums will probably still rise, the Fitch Ratings analysts expect these increases to fall to single digits, thus representing some degree of moderation from the previous year. Nevertheless, limited capacity will likely press on as demand remains high in this segment. Altogether, the reinsurance market isn’t projected to show signs of softening until 2025 at the earliest.

E&S Shifts
The excess and surplus (E&S) insurance segment provides coverage to policyholders seeking protection that’s unavailable to them from the standard insurance market, often catering to nontraditional, unique or large-scale exposures. As a growing number of carriers operating in the standard insurance market reduce their risk appetites and either exit the sector or no longer provide coverage to policyholders in certain industries or locations, the E&S environment has flourished. That is, insureds have sought to remedy coverage gaps brought on by traditional insurance market limitations by taking some of their business to the E&S space.

According to a recent report from financial services company S&P Global, premiums written in the E&S market reached $75.5 billion in 2022, up from $62.9 billion in 2021 and more than doubling 2018’s results ($34.7 billion). In 2023, the Wholesale and Specialty Insurance Association estimated that the segment grew by at least 15.9%. Further, the latest data from Fitch Ratings revealed that premiums written in the overall E&S market currently make up 9% of the entire property and casualty insurance sector, compared to less than 5% just five years prior. Even amid this surging demand and greater policy volume, industry research confirmed that the E&S market has maintained a mostly favorable pricing landscape and upheld several consecutive years of underwriting profits. As the E&S market continues to evolve, it’s important for policyholders to stay up to date on the latest developments and consult trusted insurance professionals to discuss their unique coverage needs.

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