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With a potential recession on the horizon, we know you want resources to help your business master the moment. We've put together our Agility & Excellence Resource Center to bring you strategies and solutions with a finger on the pulse of what's ahead.
Insurance experts often examine how outside influences and trends affect the insurance marketplace. Your business should follow suit to determine the factors that impact insurance coverage. Consider these sweeping market developments in 2023.
1 – Consequences from Continued Labor Shortages
A recent survey by financial services company Provident Bank reported 75% of businesses are impacted by current worker shortages. Several factors have caused these deficiencies including the pandemic’s influence on workers to reevaluate their employment priorities. Arrangements (e.g., work-life balance, compensation, expansive benefits, flexible hours, remote capabilities) are highly sought after by workers.
Economists expect labor shortages to continue throughout 2023 and foreseeably impact businesses. Shortages can contribute to overworked employees, lowered staff morale, reduced productivity, project delays, widespread skills gaps, project quality concerns, increased workplace accidents and property damage.
Many organizations have adjusted their hiring and retention tactics to combat labor shortages. Moving forward, businesses must remain innovative to meet shifts in employee expectations and attract talent.
2- Supply Chain Threats
Since the onset of the pandemic, numerous supply chain disruptions have taken place. Most issues originated from pandemic-related closures that forced production slowdowns and a subsequent lack of availability. While businesses have resumed normal operations and increased production levels, consumer demand continues to outweigh inventory. Contributing to further supply chain bottlenecks, international disruptions (e.g., global port congestion, geopolitical conflict), elevating fuel and energy expenses, catastrophic weather events and continued warehouse worker and truck driver shortages have hindered shipment and delivery times for high-demand goods.
Some economic experts believe these supply chain issues will continue into the summer of 2023 before eventually subsiding. According to the SAP survey, some business leaders plan to adopt new supply chain technology (74%), introduce updated contingency plans (67%), prioritize U.S.-based supply chain solutions (60%) and search for more eco-friendly options (58%).
3 - Inflationary Impacts
Widespread labor shortages and supply chain concern issues have contributed to rising inflation concerns in the commercial insurance space. Last year was particularly troubling, as evidenced by a surging consumer price index (CPI). Altogether, the elevated CPI has driven up claim costs for several lines of commercial coverage, therefore inflating total loss expenses across property and casualty markets.
Within the property insurance space, prompted by increased labor and material expenses, the costs to repair, replace or rebuild structures and their contents after losses have soared. In the auto insurance market, brought on by supply chain disruptions for several critical vehicle parts (and vehicles overall), repair expenses and subsequent accident costs have also surged. The workers’ compensation and liability insurance segments are also affected by other forms of inflation, namely, medical and wage inflation.
Wage inflation could prompt increased rates as payroll is leveraged as an exposure base to calculate workers’ compensation premiums.
The Federal Reserve (Fed) has steadily hiked interest rates to help curb overall inflation concerns. Moving into 2023, economic analysts predict that the Fed’s efforts will eventually pay off and inflation will slowly subsidize throughout the year. In the meantime, insurance carriers will continue to face inflation-related challenges to maintain coverage pricing to keep up with more volatile loss trends.
4 - Potential Recession Risks
During a recession, businesses without substantial revenues, excess reserves and the capital necessary to offset extended periods of loss are more prone to be forced into difficult financial decisions to avoid difficulties (e.g., insolvency, bankruptcy). Your company may need to reduce operational costs and consider staff reductions to stay operational.
According to a recent KPMG survey, more than 75% of executives confirmed that their businesses have recession-proof measures. Preventive actions include solid financial planning, scaling back operations, promoting steady cash flow, proper debt management, strong stakeholder connections and leveraging marketing strategies. Commercial risks traditionally increase during a downturn. Your business must maintain sufficient coverage in a recession and secure financial protection against potential losses.
5 – Social Inflation Influences
The insurance industry uses the term social inflation to explain social factors that drive up the cost of insurance. In general, social inflation refers to trends that influence the ever-rising costs of insurance claims and lawsuits. Current trends driving up social inflation:
- Third-Party Litigation Funding: This occurs when a third-party finances a lawsuit in exchange for a portion of the settlement. The third-party covers most, if not all, of the associated litigation expenses and, increases the volume of cases.
- Tort Reform: Used to prevent frivolous lawsuits and preserve laws that hinder abusive practices against businesses. Many states have enacted tort reforms over the last several decades, influencing fewer claims and punitive damage caps.
- Plaintiff-Friendly Legal Decisions & Large Jury Rewards: Organizations are being held to a higher standard for how they conduct their business. Juries are increasingly likely to sympathize with plaintiffs, especially if a business’ reputation has been tarnished.
6 - Historic Extreme Weather Events
Extreme weather events (e.g., hurricanes, tornadoes, hailstorms, wildfires) continue to become increasingly devastating and costly. Making matters worse, these events are not limited to one geographic area or weather event; they can impact businesses and residents across the U.S. Influential 2022 events include:
- Over 61,000 wildfires burned 7.25 million acres.
- Droughts and heat waves caused over 100 fatalities and $9 billion in damages.
- High winds and hundreds of tornadoes wreaked havoc and resulted in more than $10 billion in damages.
- A series of large-scale hailstorms and a powerful derecho contributed to over $5 billion in damages.
- The 2022 hurricane season recorded 14 storms and caused 200 fatalities and $110 billion in damages.
- Historical inland flooding produced 42 fatalities and over $1 billion in damages.
Many weather experts believe catastrophic storms, extreme temperatures, wildfires and flooding are the new norm. As these disasters become more frequent, the insurance industry will need to adopt solutions to keep up with weather-related losses. Your businesses should expect to encounter additional emphasis on weather readiness from insurers.
7 - Geopolitical Conflicts
The Russian-Ukraine war led to a year of severe international disruptions with far-reaching impacts, such as new tariffs, export restrictions, economic sanctions, and surging fuel and energy costs. International conflicts have intensified inventory backlogs, material shortages, and supply chain issues. Your organization should prepare for potential disruptions and reduce transportation costs. This can be performed by prioritizing fleet fuel efficiency, monitoring international trade policies and considering domestic production solutions (e.g., switching to domestic vendors) to remain fully operational.
These conflicts have heightened security concerns about nation-state cyber threats. Many businesses have secured insurance coverages to protect against potential cyberwarfare losses. The process can be challenging as war exclusions are commonly found in both commercial property and cyber insurance policies.
We’re Here to Help Protect Against Market Challenges
The current hardened market will force insurance buyers to face complex considerations for their insurance coverages. Thankfully, you aren’t without recourse. Your business can proactively address risk losses and manage exposures will be better able to manage the current market conditions. Leaders who educate themselves on the trends that influence their insurance will better understand what can be done to influence their rates. Connect with a member of our team for more insights and tips in the current property and casualty market.