RISK-ACADEMY Blog

Large corporations face a paradoxical crisis: 90% of buildings are underinsured while simultaneously overpaying for coverage, according to Kroll’s 2021 appraisal study. This represents a $221 billion annual global property protection gap (Swiss Re) occurring alongside systematic overpayment driven by pricing inefficiencies, with leading insurers achieving 47% loss ratios versus 73% for laggards—a 26-percentage point efficiency gap that reveals massive market dysfunction (PwC 2014-2018). The evidence demonstrates that corporations are both bleeding capital through excessive premiums AND exposed to catastrophic coverage gaps, creating what McKinsey calls “inefficient use of resources” totaling $160 billion in potential efficiency gains.

This market failure manifests across all major commercial insurance lines. Property insurance costs nearly doubled from 2013-2023 (75% increase per Deloitte), while 68% of buildings remain underinsured by 25% or more. Liability lines show combined ratios exceeding 110%, meaning insurers lose money on every dollar of premium—losses passed to buyers through pricing volatility. Workers’ compensation exhibits a stunning 70% overpayment rate due to classification errors. The fundamental dysfunction: information asymmetries, operational inefficiencies costing $17-32 billion annually, and broker conflicts of interest have created markets where price bears little relationship to risk.

Severe underinsurance despite escalating premiums

The property insurance market demonstrates the paradox most acutely. Commercial property insurance premiums increased 20.4% in Q1 2023—the highest rate in over 20 years—while Kroll’s analysis of 2020-2021 property appraisals found that 90% of buildings were underinsured, with 68% showing coverage gaps exceeding 25%. Industry experts report that quoted sums insured often represent only 60% of actual insured value (Gen Re 2020). In Germany, average underinsurance approximates 20% according to insurance specialists. This isn’t isolated to small players: recent industry research identified insurance-to-value calculation errors producing coverage gaps exceeding 30% even for sophisticated corporations (CBIZ 2024).

The financial exposure is staggering. Swiss Re’s 2015 Sigma Study documented a $221 billion annual global property protection gap, with $153 billion derived from natural catastrophe underinsurance. Over the past decade, natural disasters caused $1.8 trillion in global property damage with 70% uninsured—representing a $1.3 trillion shortfall. The 2021 Colorado Marshall Fire demonstrated this acutely: 67% of affected homes were underinsured, creating an estimated $155 million gap from just 951 total loss claims. When Hurricane Harvey struck Houston, less than 20% of at-risk homes carried flood coverage. California’s 2018 wildfires saw 80% of properties underinsured, with 60% severely underinsured.

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Despite these massive coverage gaps, corporations are paying historically high premiums. Commercial property costs climbed from $1,558 per building monthly (2013) to $2,726 (2023)—a 75% increase—and Deloitte projects costs reaching $4,890 per month by 2030, representing an additional 79% increase. Construction cost inflation drove material costs up 40% from pre-2020 levels, but pricing adjustments have created a market where corporations simultaneously overpay relative to efficient pricing benchmarks while maintaining grossly inadequate coverage limits. The U.S. P&C industry posted $21.2 billion in underwriting losses in 2023 despite these premium increases, indicating systematic pricing dysfunction rather than mere underpricing.

Broker commissions and distribution costs drive overpayment

Property and casualty broker commissions consume 17.5-25% of property insurance premiums, with total commission structures potentially increasing costs by up to 40% when broker fees combine with standard commissions. Major insurers like Chubb pay contingent and supplemental commissions ranging from 0% to 13.4% on top of base commissions. Australia’s CHOICE organization documented commercial insurance brokers and managers collecting $137 million in 2020, up from $82 million in 2016—a 67% increase in four years.

This distribution system creates perverse incentives. McKinsey’s 2025 analysis found that 60% of insurer performance is driven by operations, only 40% by market positioning, suggesting significant operational inefficiency across the industry. Academic research shows that small employers lack expertise and leverage to negotiate effectively, while large employers outsourcing to consultants “do not realize the full gains from negotiating lower prices” (CBO 2023). The U.K. presents a striking paradox: brokers place 94% of all commercial insurance premiums, yet the 80% underinsurance figure persists (Consumer Intelligence), indicating “friction in the advisory process” where the primary defense against underinsurance is failing. Distribution inefficiency manifests in direct overpayment. One JP Morgan analysis cited broker experience showing a client who compiled comprehensive property documentation reduced their renewal increase from 45% to 3-4% through detailed negotiation. This 41-percentage point differential reveals how information asymmetry and negotiating leverage create massive price variation for identical risks. Commercial insurance administrative costs run 24-33% of premiums versus under 10% for public programs, representing 14 times higher administrative costs than Medicare per dollar of claims (1988 study, ratios persist today).

Property insurance pricing shows extreme geographic and temporal variation

Market rate variations demonstrate pricing inefficiency unrelated to underlying risk. Marsh’s Global Insurance Market Index showed U.S. property rates declining 9% in Q2 2025, while casualty rates simultaneously increased 9%—divergent trends suggesting market dynamics rather than loss experience drive pricing. Quarter-over-quarter volatility is extreme: Q1 2023 saw 17% increases, Q4 2024 showed 5.45% decreases. Geographic variations are equally stark: Florida homeowners pay average premiums of $6,000 annually versus the U.S. average of $1,700—a 253% premium—while states with highest expected losses saw commercial costs increase 108% over five years compared to 96% for lower-risk states.

This pricing volatility creates the overpayment-underinsurance paradox. During hard markets, premiums spike far beyond loss trends, but corporations often respond by reducing limits or increasing deductibles rather than maintaining adequate coverage. During soft markets, premiums decline but coverage gaps persist because corporations fail to restore previous limits. A client achieving a 42-percentage point reduction through negotiation demonstrates that prevailing market prices often bear little relationship to actuarially fair premiums.

Reinsurance cost pressure exacerbates primary market inefficiency. Global property catastrophe reinsurance rates increased 37% in January 2023 renewals—the largest increase since 1992. Florida property catastrophe reinsurance saw 25% midyear 2022 increases. Reinsurance costs jumped 30.1% in 2023, double the prior year’s 14.8% increase. These costs flow through to primary buyers, but the relationship between reinsurance pricing and individual corporate property risk is indirect and opaque, creating cross-subsidies where efficient risks overpay to support inefficient market pricing.

Liability insurance shows systematic underpricing alongside selective overpayment

General liability, professional liability, and product liability lines all demonstrate pricing dysfunction, though the specific manifestations differ. The NAIC’s 2023 report documents an overall P&C industry combined ratio of 101.5%, meaning insurers paid $1.015 in losses and expenses for every $1.00 in premium. “Other liability” (encompassing general liability, E&O, cyber, and umbrella) showed a combined ratio of 110.1% in 2024, representing a 10.1-cent loss per premium dollar. This marks 7.8 percentage point deterioration from 2023’s 102.3% ratio and represents the highest level since 2016.

PwC’s landmark performance measurement study (2014-2018) revealed the true scale of pricing inefficiency: leading insurers achieved 47% average loss ratios while lagging insurers posted 73% loss ratios—a 26-percentage point gap. Leading insurers also maintained 24% expense ratios versus 32% for laggards. Most tellingly, leading insurers achieved these superior results with lower investment returns than competitors, demonstrating that operational excellence and pricing discipline—not market positioning—drive profitability. The study found leaders operate at 54% underwriting beta (volatility) versus 129% for laggards, contradicting the traditional “high risk, high reward” thesis. This suggests that pricing inefficiency allows superior operators to select better risks at adequate prices while inefficient operators overpay for risk or systematically underprice coverage.

Commercial auto liability provides the starkest evidence of systematic mispricing. The line posted a 113.3% combined ratio in 2023, representing 14 consecutive years of underwriting losses totaling $3.3 billion in 2022 alone. Loss ratios climbed from 66.55% (2021) to 77.63% (2024), with average loss severity doubling from 2015-2024 at 8% annual increases—well above 3% economic inflation. Despite 46 consecutive quarters of rate increases through Q4 2023, the line remains deeply unprofitable. This persistent underperformance indicates insurers systematically fail to price social inflation and nuclear verdict trends, yet continue writing business at inadequate rates. Corporations paying these inadequate premiums receive a false sense of security while building up unrecognized liability exposures from insurers’ adverse reserve development.

Massive underinsurance exists despite high liability premiums

73% of companies operate while underinsured according to Hub International’s 2025 North American Outlook Report. This underinsurance manifests through systematic coverage gaps in standard commercial general liability policies. Standard CGL policies exclude 15+ major risk categories including catastrophic risks, pollution liability, cyber liability (despite increasing digital operations), professional errors, product recalls, PFAS contamination, and sexual abuse/human trafficking exposures. These exclusions leave corporations exposed to losses that far exceed insured amounts.

Product liability demonstrates the paradox most clearly. Product contamination and recall insurance represents an estimated $500 million market while product liability insurance totals $3.3 billion—meaning companies buy six times more bodily injury coverage than first-party recall coverage despite recall costs typically being materially larger than injury claims. The average food recall costs $10 million in direct costs excluding brand damage (2012 FMI/GMA study), yet the recall insurance market remains tiny. Real-world examples prove the point: the 2009 peanut recall caused $1 billion in industry losses; the 2018 romaine E. coli outbreak cost $280-350 million; the 2019 Blue Bell listeria incident resulted in $19.35 million in criminal fines, 2,850 lost jobs, plus a $60 million uninsured D&O settlement.

FDA food recalls saw units impacted increase 700.6% from 2021 to 2022 (52.1 million to 416.9 million units), yet product recall insurance purchases haven’t kept pace. Insurance brokers and retail agents represent a “major failure point” as product recall insurance isn’t covered on most standard agent license exams, leaving many unfamiliar with coverage. This systematic distribution failure means corporations unknowingly operate with massive first-party recall exposure while paying premiums that reflect third-party injury risks.

Professional liability and D&O insurance show similar gaps. Medical professional liability market premiums shrank 2% over a 10-year period (2013-2023) despite healthcare expenditures increasing 50%, creating systematic underpricing and market exit. Professional liability policies’ claims-made structure creates coverage gaps when policies lapse or companies switch carriers without tail coverage. Many professionals carry minimum limits ($250K-$1M) insufficient for major claims while settlements and judgments rise faster than typical coverage limits.

D&O insurance pricing volatility demonstrates extreme market dysfunction

Directors and officers liability insurance experienced the most dramatic pricing swings of any commercial line. Premiums reached 4.7x their Q1 2018 levels by Q1 2021, then collapsed to 1.9x 2018 baseline by Q2 2024—a 60% decline from peak in just three years. This 370% swing demonstrates extreme market inefficiency driven by capital flows rather than loss experience. The hard market of 2020-2021 saw average quarterly rate increases of 14%, with small/mid-cap companies and IPO/SPAC entities experiencing even steeper increases. Companies paid historically high premiums during this period yet faced coverage restrictions, higher retentions, and narrower terms.

The subsequent soft market beginning in 2023 saw average rate changes plummet to 0.1% quarterly, with 68% of renewals receiving price decreases averaging 9.7% by 2024. Yet securities class action filings increased 10% in H1 2024 to 104 cases, putting the year on track to exceed 200 filings for the first time since 2020. Half of cases from the past five years remain open, creating latent liability. TransRe’s analysis warns that “today’s U.S. public D&O insurance market is, in the aggregate, unprofitable” with high excess layers only up 6.6% since 2013 while the S&P 500 more than tripled. Legal service inflation runs 8.3% (2024) versus a 4.3% average from 2015-2024, yet pricing declined 3.9% in Q4 2024.

This pricing cycle demonstrates the overpayment-underinsurance paradox perfectly. During the hard market peak, companies paid maximum premiums while accepting higher retentions ($1-10M for larger buyers), narrower coverage, and stricter terms—simultaneously overpaying relative to efficient pricing while underinsured relative to exposures. As the market softened, new capacity entered chasing returns, driving prices down regardless of underlying loss trends. AM Best’s 2024 analysis found direct monoline D&O premiums declined 12.7% year-over-year despite a 51.5% loss ratio (lowest in nine years), with adverse reserve development from 2017-2020 accident years still uncertain. The dramatic swings and “easy come, easy go” behavior indicate what TransRe calls “irrational group-think” rather than rational pricing based on loss experience.

Workers’ compensation overpayment reaches 70% due to classification errors

Workers’ compensation shows a different manifestation of pricing inefficiency: systematic overpayment driven by complexity rather than underinsurance. The Institute of WorkComp Professionals reports that 70% of companies overpay workers’ compensation insurance premiums due to worker classification errors. Given that classification codes determine premiums ranging from $0.30 per $100 of payroll for clerical positions to $30 per $100 for roofers—a 100-fold difference—misclassification creates massive overpayment.

Documented cases include a North Carolina sawmill that overpaid $400,000 over several years, a Colorado healthcare company whose premiums unexpectedly skyrocketed due to misclassification, and an Indiana contractor paying expensive roofing premiums for clerical workers who never worked on construction sites. Construction, agriculture, and staffing services face the highest misclassification risk. Policy-mandated audits sometimes fail to catch overpayments within required 12-month periods, leaving corporations paying excessive premiums for years.

Despite this widespread overpayment, workers’ compensation remains the most profitable major commercial line with a 2024 combined ratio of 88.8% (S&P). The line’s 50.39% loss ratio in 2024 meant insurers paid out only about half of premiums in claims, with the remainder covering expenses and profit. This profitability amid systematic customer overpayment demonstrates pricing inefficiency: insurance should price risk accurately, yet 70% of buyers pay more than actuarially appropriate while insurers earn outsized returns. The market fails to self-correct because classification complexity creates information asymmetry favoring insurers.

Cyber insurance pricing operates without adequate loss data

Cyber insurance faces structural pricing inefficiency: insurers lack sufficient historical incident and claims data to accurately price risk. The Atlantic Council, CISA (2018), RUSI (2021), and GAO (2022) all identified “insufficient historical cyber incident and claims data” as the “chief roadblock to effective cyber insurance.” Oxford Academic’s analysis of filed policies found carriers pricing using “competitive analysis rather than actuarial data”, with one carrier stating: “underwriters collectively have over 40 years’ experience… collective knowledge… was used to establish rates” rather than loss data.

This data deficiency creates extreme pricing volatility. From 2020-2022, cyber premiums spiked dramatically during a ransomware surge. In 2023, rates decreased an average 15% following improved loss experience. By Q4 2024, rates declined 5% as loss ratios remained below 50%, indicating continued profitability despite rate cuts. The market grew from a 26% corporate take-up rate (2016) to 47% (2020), projected to reach $40 billion in global premiums by 2030 from $16.6 billion in 2025 (Swiss Re). Yet only 10% of SMEs carry cyber insurance versus 80% of large corporates, demonstrating massive underinsurance among smaller companies.

Recent incidents prove underinsurance persists even among major corporations. The February 2024 Change Healthcare attack caused a $3.09 billion pre-tax financial impact from failure to implement multi-factor authentication. Only one of three major UK retailers (M&S, Co-op, Harrods) affected by ransomware had cyber insurance. While 1,228 incidents were reported across U.S. clients in 2024 (22% increase year-over-year), 776 cyber claims were filed (one-third increase), and ransomware incidents rose 24%, many corporations remain uninsured or underinsured. Average ransomware payments of $553,959 in Q4 2024 demonstrate meaningful financial exposure, yet the cyber insurance protection gap reaches 99% with 2020 economic losses of $950 billion against only $7 billion in cyber insurance market size (McAfee data).

Loss ratio analysis reveals massive performance variation

NAIC data for 2024 reveals stark performance differences across commercial lines. Fire insurance achieved a 41.27% loss ratio (best in property), allied lines posted 49.13%, commercial multiple peril non-liability showed 49.92%, and inland marine recorded 43.58%. These property lines operate profitably with combined ratios in the 75-85% range. By contrast, liability lines struggle significantly: “other liability” reached 70.77% loss ratios (110.1% combined ratio), commercial auto liability hit 77.63% loss ratios (113.0% combined ratio representing 14 consecutive years of losses), and products liability posted 52.46% loss ratios (99.8% combined ratio showing 10.3-point year-over-year deterioration).

The performance gap between leading and lagging insurers dwarfs line-of-business differences. PwC’s study documented leaders achieving 47% loss ratios with 24% expense ratios (71% combined ratio) versus laggards’ 73% loss ratios and 32% expense ratios (105% combined ratio)—a 34-percentage point combined ratio differential. Leaders achieved this while maintaining lower volatility (54% underwriting beta versus 129% for laggards) and generating lower investment returns, proving operational excellence drives results rather than risk-taking or favorable market conditions.

Among the top 20 commercial auto insurers in 2024, 14 posted combined ratios exceeding 100%, with worst performers ranging from 123-130% (Sentry at 130.0%, Chubb at 126.2%, State Farm at 123.6%) while best performers achieved 88-92%. This 40+ percentage point variation for similar coverage demonstrates that pricing inefficiency creates winners and losers independent of underlying risk. Swiss Re documented $16 billion in adverse reserve development for commercial liability lines in 2024 alone, with $62 billion over the past decade—equivalent to damages from two major hurricanes. This systematic reserve inadequacy indicates the industry chronically underpriced long-tail liability risks while individual buyers experienced vastly different outcomes based on insurer selection.

Social inflation drives liability costs far beyond premiums

Swiss Re’s 2023 analysis found commercial liability costs rising 16% annually (five-year average) while economic inflation ran only 3%—a 13-percentage point social inflation premium. AM Best’s commercial auto analysis documented average loss severity doubling from 2015-2024 with 8% annual increases versus 3% economic inflation. “Nuclear verdicts” exceeding $10 million drive unpredictable costs, with large verdicts creating precedent that leads plaintiffs in other cases to seek similar awards, “quickly making existing reserves inadequate.”

Third-party litigation funding, proliferating legal advertising, and anti-corporate sentiment in jury verdicts all contribute. Yet insurers systematically fail to price these trends adequately. Commercial auto liability endured 46 consecutive quarters of rate increases through Q4 2023 yet remained deeply unprofitable with $6.4 billion in losses from the liability component alone in 2024 (partially offset by $1.5 billion profit from physical damage). Products liability saw 10.3-point combined ratio deterioration year-over-year, approaching unprofitability despite premium increases. “Other liability” deteriorated 7.8 points from 2023 to 2024, reaching its worst performance since 2016.

This creates a pernicious cycle: insurers underprice social inflation, suffer losses, then spike rates during hard markets before competitive pressure forces rates down again. Corporations caught in hard markets overpay relative to efficient pricing while those renewing during soft markets appear to underpay, yet both face underinsurance relative to true exposure because social inflation means existing limits become inadequate faster than corporations adjust coverage. The $62 billion adverse development over a decade suggests corporations collectively purchased $62 billion less coverage than needed, yet many simultaneously overpaid relative to insurers’ cost structures.

Consulting firms document $160 billion efficiency opportunity

Major consulting firms have extensively documented commercial insurance market inefficiencies. Accenture’s 2022 study found $170 billion of insurance premiums at risk over five years from poor claims experiences, with 31% of claimants not fully satisfied, 30% of dissatisfied claimants switching carriers, and 47% considering switching. The firm identified $160 billion in potential efficiency gains from underwriting improvements by 2027, noting that up to 40% of underwriter time is spent on non-core administrative activities. This translates to annual efficiency losses of $17-32 billion from underwriting inefficiency alone.

McKinsey’s analysis revealed that the average insurance company destroyed $27 million in economic profit annually from 2013-2017 while the top quintile captured all industry economic profit averaging $764 million per year. Industry cost ratios increased approximately 10% from 2012-2017 despite rising labor productivity, with the gap between leaders and laggards widening substantially. Bottom-quartile insurers primarily drove cost inefficiency expansion. McKinsey found that most global insurance carriers failed to generate value even before the pandemic, with markets becoming problematic as insurers “sacrifice long-term profits for short-term growth” through price wars and aggressive competition.

BCG’s research documented that “there is no good price for a bad risk” in current environments where catastrophe loads leave less margin for attritional losses. The firm noted carriers hindered by siloed operations, uncoordinated processes, and legacy technology debt face significant challenges. Only 33% of insurers report advanced use of automation, AI, and data analytics in pricing, with most historically struggling to incorporate price sensitivities and customer behavior. Deloitte’s analysis found the 80% underinsurance figure persists despite brokers placing 94% of commercial premiums, indicating “friction in the advisory process” potentially caused by brokers being “stretched by regulatory burdens.”

Academic research confirms information asymmetry and market failures

Nobel Prize-winning foundations by Arrow (1963), Akerlof (1970), and Rothschild & Stiglitz (1976) established that asymmetric information creates market failures in insurance, with competitive forces potentially failing to push toward efficiency in large, important markets. Einav, Finkelstein, and Levin’s empirical work found that multidimensional heterogeneity—consumers differing in both risk AND preferences—creates complex dynamics where lower-risk individuals may be more risk-averse, creating offsetting self-selection patterns that standard adverse selection models miss.

Harvard’s Kong, Layton, and Shepard study identified a large “selection wedge” of 20-30% of average costs driven by information asymmetry. They found that “adverse selection pushes firms toward aggressive price cutting to attract price-sensitive, low-risk consumers, creating a wedge between average and marginal costs that limits how many firms can profitably survive.” Without corrective policies, this can “unravel the market to monopoly”—an “un-natural” monopoly driven by information problems rather than efficiency. Interventions limiting price-cutting can improve welfare by supporting more entry and ultimately leading to lower prices through competition.

Duke University’s Rampini research documented the “risk management paradox”: financially constrained firms that could most benefit from insurance hedging lack resources to purchase adequate coverage. Financial constraints simultaneously serve as both the reason firms should hedge and the reason they don’t. When income drops, people reduce insurance despite being more financially constrained and needing protection more, because insurance requires premium payments today for uncertain future benefits. This explains why 73% of companies operate underinsured even while many overpay: constrained firms reduce limits to afford premiums, while inertia-bound customers maintain expensive legacy coverage without optimizing.

Commercial insurance prices show healthcare-parallel inefficiency

Congressional Budget Office analysis of healthcare provides instructive parallels to commercial insurance. CBO found that “price variation among commercial insurers greatly exceeds price variation in Medicare fee-for-service,” suggesting “market inefficiency, including the ability of some providers to command prices far exceeding their costs.” Commercial insurers pay 2.4x Medicare rates for hospital outpatient services, 1.8x for inpatient services, and 1.3x for physician services overall. Price growth from 2013-2018 ran 2.7% annually for commercial insurers versus 1.3% for Medicare—one percentage point above inflation.

Academic research shows “strong positive relationship between market concentration and prices paid by commercial insurers,” yet 30% of high-priced hospitals operate in unconcentrated markets, suggesting pricing power sources beyond market share. Small employers lack expertise and leverage to negotiate effectively; large employers outsourcing to consultants “do not realize the full gains from negotiating lower prices.” Limited antitrust enforcement compounds the problem: from 2010-2018, antitrust agency appropriations declined in real terms while merger filings increased substantially. Medical loss ratio requirements may perversely incentivize higher spending rather than efficiency, similar to expense structures in P&C insurance.

Commercial insurance administrative costs of 24-33% of premiums (versus under 10% for Medicare) mirror the healthcare findings. This represents 14 times higher administrative costs than Medicare per dollar of claims based on 1988 research, with ratios persisting in modern markets. The 1988 study estimated $13 billion could be saved if efficient programs replaced commercial insurers—equivalent to multiples higher today. Insurance markets exhibit what behavioral economics research calls “anomalous behavior” requiring intervention, with demand affected by loss aversion, ambiguity aversion, and cognitive limitations in evaluating complex products.

Catastrophe losses exacerbate property pricing while gaps persist

Natural catastrophe frequency and severity drive property insurance pricing, yet coverage gaps widen. The U.S. experienced 28 separate billion-dollar weather events in 2023 with $92.9 billion in estimated costs—up 56% from 2022 and 180% (10.8% CAGR) over 10 years prior. Since 2017, the U.S. averaged 15 catastrophes exceeding $1 billion annually, up from fewer than 10 per year in the previous decade and fewer than six before 2007. First-half 2023 alone saw $34 billion in insured natural disaster losses, with 68% from severe convective storms. Global 2023 insured losses from natural disasters reached $88-112.5 billion, 17% above average.

These escalating losses drive premium increases, with catastrophe modeling and reinsurance costs flowing through to corporate buyers. Yet the protection gap simultaneously widens. Swiss Re documents a $130-140 billion natural catastrophe protection gap in 2021, with more than 60% concentrated in North America and Europe, mostly attributable to commercial lines. McKinsey notes that commercial P&C premiums as a percentage of GDP declined from 1.8% to 1.6% in North America (more than 10% decline) when adjusted for rate hardening, meaning “commercial P&C lines are losing market relevance” even as premiums grow nominally.

The paradox: catastrophe losses drive rate increases that make coverage less affordable, causing corporations to reduce limits or increase deductibles, which widens protection gaps even as they pay higher absolute premiums. Nine Florida-focused P&C insurers became insolvent since 2021 due to poor market financial performance, forcing the state-run Citizens Property Insurance Corporation to become increasingly vital as private insurers withdraw. This capacity reduction drives remaining market prices even higher while corporations struggle to secure adequate limits at any price. The result is simultaneous overpayment relative to efficient risk pricing and underinsurance relative to actual exposure.

Small and mid-size enterprises face acute underinsurance crisis

While this report focuses on large corporations, SME data illuminates market dynamics affecting all buyers. 75% of U.S. small businesses are underinsured (Hiscox 2023), with 80% of high-growth SMEs underinsured or having wrong coverage (Publicis Sapient). Over 70% of small business owners lack clear understanding of business insurance coverage, with 83% unable to accurately describe general liability and 71% unclear about business owner’s policies. Nearly 70% don’t fully understand their coverage or how it works, while 39% of businesses operating 10+ years have never updated general liability insurance.

McKinsey identified €2 billion in untapped market potential from underinsured SMEs in Germany alone, with only one-third of German SMEs completely satisfied with current coverage (2020). Despite 92% of small businesses having insurance (up from 72% in 2023), only 13% feel completely prepared to face potential threats, with 87% feeling less than fully prepared. The remaining 8% of small businesses stay uninsured primarily due to cost and confusion. This suggests that as companies grow from small to mid-size to large, they carry forward underinsurance patterns established early, never conducting comprehensive coverage reviews.

The data contradicts the assumption that large, sophisticated corporations optimize insurance purchasing. If 75% of small businesses are underinsured and 73% of all companies operate underinsured (Hub International), large corporations clearly aren’t immune despite having more resources for risk management. The 90% building underinsurance rate (Kroll) and persistent 80% underinsurance figure despite 94% broker placement demonstrate that market structure—not buyer size or sophistication—drives dysfunction. Large corporations may have marginally better outcomes but still systematically overpay (through broker commissions, administrative costs, and pricing inefficiency) while maintaining inadequate coverage (through index-linked policies that don’t track true replacement costs, coverage gaps, and failure to adjust limits as exposures grow).

Premium growth massively outpaces loss growth yet gaps persist

From 2020-2024, total P&C earned premiums grew from $717.2 billion to $1,029.3 billion (43% increase) while total losses rose from $429.1 billion to $636.1 billion (48% increase). Loss ratios fluctuated: 59.83% (2020), 62.43% (2021), 67.34% (2022), 65.53% (2023), 61.80% (2024). Combined ratios showed: 99.6% (2020), approximately 100% (2021), 103.1% (2022), 103.7% (2023), 96.5% (2024). The 2024 result marked the best underwriting performance in over a decade, with S&P noting significant improvement from prior years.

Yet this aggregate profitability masks severe line-level dysfunction. Workers’ compensation posted an 88.8% combined ratio (highly profitable), fire insurance achieved 77.2%, and commercial auto physical damage reached 88.6%. These profitable lines subsidize systematic losses in commercial auto liability (113.0% combined ratio, 14 consecutive years of losses), “other liability” (110.1% combined ratio, worst since 2016), and products liability (approaching break-even with rapid deterioration). The cross-subsidy means corporations with favorable loss experience in profitable lines overpay to support industry losses in unprofitable lines.

This dynamic explains how overpayment and underinsurance coexist. Premium growth of 43% over four years substantially exceeded loss growth in profitable lines, meaning well-performing risks paid far more than actuarially necessary. These excess premiums funded chronic underpricing in liability lines where combined ratios exceeded 110%. Corporations with good property loss experience effectively subsidized corporations with adverse liability experience, while both groups face underinsurance: property risks through inadequate limits relative to replacement costs, liability risks through insufficient limits relative to social inflation and nuclear verdict trends. The market’s inability to accurately price and segment risk creates diffuse overpayment funding concentrated underpricing, with coverage gaps persisting across all buyer segments.

Market concentration limits competition while pricing varies wildly

The top 10 P&C insurers control 51.4% of market share (NAIC 2024), with the top 25 holding approximately 67%. State Farm commands 10.23%, Progressive 7.13%, Berkshire Hathaway 5.94%, and Allstate 5.25%. This concentration theoretically provides pricing power, yet performance varies enormously. Progressive Group’s commercial auto loss ratio reached 61.46%, Travelers achieved 54.06% across all lines, and Chubb posted 58.09%, while Berkshire Hathaway recorded 62.07%. These leading insurers significantly outperform industry averages in loss ratios yet charge competitive market rates, suggesting widespread market mispricing.

Market concentration should drive pricing efficiency through economies of scale and data advantages, but evidence suggests the opposite. The 26-percentage point loss ratio gap between leaders (47%) and laggards (73%) from PwC’s study persists despite high concentration, indicating that market share doesn’t translate to pricing discipline. Commercial auto shows 14 of the top 20 insurers posting combined ratios exceeding 100%, with variation spanning 40+ percentage points among major carriers. If markets priced efficiently, such persistent performance gaps wouldn’t exist—competition would force laggards to either improve operations or exit markets.

The persistence of this inefficiency suggests barriers preventing market forces from working. Regulatory requirements maintain insurer solvency rather than operational excellence, allowing inefficient operators to persist. Distribution through brokers creates information asymmetries favoring incumbent relationships over price competition. Product complexity prevents buyers from effectively comparing offerings. Contract opacity makes ex-ante price comparisons difficult while ex-post analysis requires actuarial expertise most corporations lack. The result: large corporations can’t effectively arbitrage pricing inefficiencies even when aware they exist, leaving them simultaneously overpaying (relative to efficient operators’ costs) and underinsured (because pricing volatility discourages maintaining optimal limits through market cycles).

Evidence synthesis reveals structural market failure

Synthesizing evidence across all research domains confirms the hypothesis that large corporations systematically overpay for insurance while remaining underinsured. Property insurance shows the clearest patterns: costs increased 75% (2013-2023) while 90% of buildings are underinsured with 68% showing gaps exceeding 25%, creating a $221 billion annual global protection gap. Broker commissions consume 17.5-25% of property premiums, with total distribution costs reaching 40%, while administrative expenses run 24-33% versus under 10% for public programs. Corporations paying these elevated costs still maintain coverage representing only 60% of actual insured value, with insurance-to-value errors exceeding 30%.

Liability insurance demonstrates overpayment through combined ratios exceeding 100% (meaning insurers systematically underprice, then correct through rate spikes during hard markets), with 26-percentage point loss ratio gaps between efficient and inefficient insurers revealing that many corporations overpay relative to best-practice pricing. Yet 73% of companies remain underinsured, with product recall insurance markets totaling one-sixth of product liability markets despite recall costs materially exceeding bodily injury costs. D&O premiums spiked 370% then fell 60% in six years—volatility unrelated to fundamental loss trends—while securities litigation increased. Workers’ compensation sees 70% overpayment from classification errors while maintaining 88.8% combined ratios showing systematic overpricing relative to losses.

The mechanisms driving this paradox include: (1) information asymmetry preventing accurate risk assessment and creating adverse selection dynamics, (2) broker conflicts of interest and distribution inefficiencies consuming 30-40% of premiums without corresponding value creation, (3) product complexity preventing effective comparison shopping, (4) pricing volatility incentivizing corporations to reduce coverage during hard markets without restoring it during soft markets, (5) adverse reserve development of $62 billion over a decade proving systematic underpricing that ultimately flows back to buyers through rate corrections, and (6) social inflation and catastrophe trends outpacing pricing adjustments, creating underinsurance even for corporations paying elevated premiums. The $160 billion efficiency opportunity Accenture identified, combined with McKinsey’s finding that average insurers destroy $27 million annually in economic profit, demonstrates that market dysfunction creates dead-weight losses harming both buyers and efficient operators while allowing inefficient insurers to persist through pricing complexity and regulatory protection from market forces.