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Why Your Business Might Be a Tough Sell for Insurers

Some business owners may mistakenly believe that their business is too small to insure or that some other type of coverage already protects them. However, regardless of size, every company faces risks that should be addressed through insurance. It is essential to recognize that business insurance offers specialized coverage for the unique risks faced by your business. By obtaining commercial business insurance quotes, you can ensure you have the appropriate range to protect your business assets.

That said, getting coverage for your business venture isn’t always easy. A business insurance application differs significantly from other types of insurance you may have purchased, such as home or auto insurance. The risk is much bigger and affects more people than just the property owner. Insurance risk is a significant consideration concerning the potential exposure of financial damages to your business or the insurer. As a business owner, it is crucial to understand the factors that can make your business hard to ensure that you can avoid surprises when obtaining quotes or starting an application.

Individual Factors That Impact Insurability

Insurers assess the risk of a business based on several factors. These factors can significantly affect your business’s insurability and the premiums you are quoted. It’s essential to be aware of these factors and take proactive measures to mitigate risks. Let’s explore key factors that can make a business hard to insure.

1. Claim History

One factor that can significantly impact insurance risk is the frequency and size of claims made by a business. If your company has a history of multiple claims or has filed large claims in the past, insurers may view it as a higher risk. Frequent or substantial claims indicate a higher likelihood of future claims, which can result in increased financial liabilities for the insurer. To improve your insurability, focus on implementing safety measures, training employees on risk management, and maintaining proper documentation to demonstrate your commitment to minimizing future claims.

In addition, you’ll be hard-pressed to find an insurance company willing even to quote your business insurance if you have an open and pending claim.

2. Nonrenewed Policies

If your previous insurance policy was nonrenewed, it could raise red flags for insurers considering providing coverage for your business. Insurance companies may see this as a sign that your business presents too much risk or has not complied with policy terms and conditions. To address this issue, it is essential to understand why your policy was not renewed. Ask your insurer or advisor what the reason was given for the cancellation. Was it payment issues, did the policy lapse in coverage upon renewal without you signing a proper cancellation release, or is there some aspect of the business functions deemed not in the insurer’s best interest to keep?

Now, you may be wondering: Is it possible for an insurance company to cancel a policy? Yes, it is. If an insurer decides to stop servicing a specific region or offering a particular line of business, they have the right to “no-renew” your policy. In such cases, you will receive a notice from the insurer informing you that they will no longer provide the service in question. Insurance companies sometimes make changes to their portfolio to meet the needs of their customers better and fulfill their fiscal responsibilities to shareholders.

The good news is that this type of cancellation does not reflect any negligence on your part. However, it must be declared with a new insurance application, which can sometimes lead to delays in placing coverage.

3. Unusual or Dangerous Operations

Certain businesses inherently carry more risk due to the nature of their operations. If your business engages in activities that are considered unusual or dangerous, insurers may perceive it as a greater risk. Examples of such industries include construction companies, chemical manufacturers, and adventure tourism operators, to name a few.

To overcome this challenge, communicate the measures you have in place to minimize risks associated with your operations. Investing in safety protocols, employee training, and proper equipment can help give insurers the confidence they need to offer coverage.

4. Property Maintenance

The condition of your business property plays a significant role in insurance risk assessment. If your property is in disrepair or shows signs of neglect, it may raise concerns for insurers. Poorly maintained buildings, outdated electrical systems, or inadequate security measures present potential hazards that increase the likelihood of accidents or damage.

To improve your insurability, invest in regular maintenance and upgrades to ensure your property meets safety standards. Committing to maintaining a safe environment can positively impact your insurance premiums.

External Conditions: Commercial Hard Market

The insurance sector operates in hard and soft market cycles. In a hard market, insurance companies apply more stringent underwriting and charge higher premiums. There’s a reduced supply of insurance coverage and a subsequent increase in demand. Insurers are more likely not to take a new business application for an operation that presents a high risk. Francisco Saldias, Property and Casualty Specialist at Sovereign Insurance, says that

When the hard market hits, pricing becomes less relevant and there’s increased focus on risk selection. It can also lead to rate increases for clients and, in some cases, contracts aren’t being renewed, which is stressful.

Canada’s Association of home, auto, and Business has issued a warning that the country’s property and casualty insurers are at risk from historically high inflation rates. This could potentially prolong the hard market in commercial lines.

Don Forgeron, president and CEO of Insurance Bureau of Canada, and panellist at Swiss Re’s 36th Annual Canadian Insurance Outlook Breakfast, said on Apr. 5th 2024,

On the commercial side, I think this inflation is either going to prolong the hard market that we’re currently in, or it’s going to make the exit from the hard market all the more challenging.

The current Consumer Price Index (CPI) stands at 5.7%, which is nearly the highest it has been in the past 30 years, according to Forgeron. In our industry, the inflation rate is even higher. Homeowners are experiencing a 13% increase in replacement costs compared to pre-COVID levels. Construction costs are also on the rise. As for automobiles, the prices of new vehicles have increased by more than 7%, used vehicles have seen a staggering 34% increase, and rental prices have surged by 24%.

In addition to the impact of Russia’s invasion of Ukraine on the global economy, inflationary pressure caused by the pandemic is still being felt worldwide. However, according to Mike Mitchell, head of property and specialty underwriting for reinsurance at Swiss Re, inflation is not solely driven by the pandemic. There are multiple factors contributing to the fragility of the global economy at present.

Amidst these challenges, insurers must remain vigilant for any future major catastrophes. “I think you’ve got the baseline inflation, which is something new for us, enhanced by COVID, enhanced again by the geopolitical situation,” Mitchell said. “And the challenge we face is that if you throw a really big catastrophe on top of that, I think we’re probably exposed to an exponentially higher rate of disruption and inflation than we’ve anticipated at the moment.”

Forgeron expressed his hope that regulators in the industry will be aware of the implications of historic inflation on insurers’ books during the rate-setting process.

We recommend consulting an insurance brokerage early, months before renewal or the date stipulated that you must have insurance in place. While these factors are not always a hard stop for getting insurance, it can take longer as an insurance company underwriter may need to review the application with their team members.

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