Middle-market companies are facing significant challenges as they try to cut costs in a tough insurance market. Many are opting for cheaper coverage, which may seem like a good idea at first, but it can leave them vulnerable to major losses. As insurance premiums rise and coverage options shrink, these businesses are realizing that their old strategies are no longer effective.
Jeff Jones, a managing director at Insurance Office of America, highlights that for years, middle-market firms have struggled with limited resources. Now, with ongoing tariffs and supply chain issues, their focus has shifted away from essential areas like customer service and employee retention to simply trying to save money. This shift has led to a dangerous lack of attention to risk management.
Companies that treat insurance as just another routine task may find themselves in serious trouble when unexpected incidents occur. Many business owners mistakenly believe that cheaper policies offer sufficient protection, only to discover the limitations of their coverage when they need it most. For instance, if a serious incident occurs on their property and they are unaware of specific exclusions in their policy, they could face devastating financial consequences.
The mindset that cheaper is better is costly. Exclusions in policies are becoming more common, and terms are tightening. Jones and his colleague Aaron Cohen warn that many firms still carry outdated coverage limits, which can be risky in today’s environment where even minor claims can lead to multimillion-dollar losses. They emphasize that even small businesses need to think about higher liability limits, as a catastrophic event can happen without warning.
Additionally, the tendency to keep low deductibles is driving up premiums without offering better protection. Jones points out that paying for every small claim is often a poor investment. Instead, businesses should consider self-insuring for minor losses and using insurance for significant, unexpected events.
As traditional insurance becomes pricier and less dependable, businesses with solid financials should explore alternative risk financing options. This could include group captives or even establishing their own captive insurance company. While this approach may not suit every business, it can be a smart move for those with fewer losses.
The shift towards excess and surplus (E&S) lines is another trend. These non-admitted carriers provide necessary capacity but come with less regulatory oversight and stricter coverage terms. Jones notes that many firms are being pushed into the E&S market, especially in regions where traditional carriers are pulling out, leaving them with limited choices and protection.
For insurance brokers, this environment calls for a new approach. They need to move beyond simply providing quotes and instead act as strategic partners. Brokers should help clients assess risks across their entire business, not just focus on the insurance policy itself. This means discussing potential risks and planning for disasters, such as facility fires or cyberattacks.
Jones believes that integrating risk management into overall business strategy is crucial. Companies that can do this will be better positioned to handle the current volatility in the market. Those that fail to adapt may find themselves falling behind.