Pevita Pearce
Many Certified Public Accountants (CPAs) entered 2026 anticipating a period of relief for their business clients in the commercial insurance market. Following two years of substantial premium increases, indicators began to emerge suggesting a moderation in pricing, with some lines even experiencing a softening. On the surface, the renewal season appeared more manageable than it had been in recent memory. However, for a significant number of privately owned companies, the financial exposure—the actual risk retained by the business—did not follow the downward trend of premiums. Instead, deductibles escalated, coverage definitions became more restrictive, and exclusions broadened. Insurers, in many instances, did not merely adjust prices; they fundamentally recalibrated the extent of financial absorption they were willing to undertake.
This recalibration has led to a quieter but more consequential shift in the insurance landscape. While insurance still plays a vital role, its capacity to absorb financial volatility has diminished. Consequently, many companies are now retaining a larger first layer of potential losses. This increased retained exposure is being funded through operating cash flow, existing reserves, or by leveraging borrowing capacity. While the premium line on financial statements might appear stable or even reduced, the underlying balance sheet risk may have significantly increased, creating a disconnect that CPAs are increasingly recognizing as a critical advisory concern.
The Illusion of Price Relief: A Deeper Dive into Coverage Shifts
Insurance headlines often tend to focus on broad pricing indexes, which painted a picture of some market relief as 2026 approached. However, these aggregated figures mask the nuanced reality of where the actual pressure is being applied. According to WTW’s Commercial Lines Insurance Pricing Survey, U.S. commercial insurance prices saw an increase of 5.6 percent in the fourth quarter of 2024 compared to the same period in the previous year. Notably, liability lines continued to outpace the overall market. Excess and umbrella coverage, in particular, were still experiencing double-digit increases, even as other insurance lines showed signs of cooling.
These layers of coverage are critically important because they dictate when insurance protection begins to pay out. As the attachment points—the threshold at which insurance coverage kicks in—rise, businesses are compelled to absorb a greater portion of losses before any carrier capital is deployed. A commercial insurance program that, in prior years, might have covered the first $1 million of a loss could now have an attachment point of $5 million or even $10 million, even if the stated policy limits appear similar on paper. This effect is compounded by narrower definitions of what constitutes a claim or an occurrence, further limiting the scope of coverage. The net result is an insurance program that may cost roughly the same as before but transfers significantly less financial volatility from the business.
From a financial perspective, this presents a dangerous illusion. The insurance policy still displays substantial limits, creating a perception of robust protection. However, the proportion of potential losses that will flow directly through operating income continues to grow. This widening gap between the cost of insurance and the actual protection it provides defines the challenging market environment of 2026.
Why Capital Remains Cautious: The Impact of Severity and Unpredictability
The underlying pressures in the current insurance system are not primarily driven by the sheer volume of claims. Instead, the significant concerns stem from the escalating severity and unpredictability of claims. The Swiss Re Institute reported that social inflation, largely fueled by rising litigation costs and larger jury awards, pushed U.S. liability claims up by an astonishing 57% over the past decade, with 2023 marking a peak year for this trend. Further underscoring this, a report by Marathon Strategies found that the median “nuclear verdict” (an exceptionally large jury award) reached $51 million in 2024, an increase from $44 million in 2023. These outcomes transform liability risk into a capital management problem because such large and unpredictable awards resist traditional actuarial modeling and pricing.
This same uncertainty profoundly influences the behavior of reinsurance capital. Reinsurers are increasingly treating large loss volatility not as a cyclical market phenomenon but as a fundamental balance sheet exposure. Munich Re reported global insured catastrophe losses of $108 billion in 2025, with a substantial $98 billion of that total originating from the United States. Concurrently, NOAA recorded 27 U.S. billion-dollar weather and climate disasters in 2024, marking the second-highest count on record. These figures reinforce a critical observation: high-severity losses are no longer arriving as rare, isolated shocks. They are manifesting as a discernible pattern.
When reinsurance capital begins to price such volatility with a long-term perspective, primary insurers are compelled to respond by limiting the amount of risk they are willing to hold. This translates directly into actions such as raising attachment points, tightening policy definitions, and capping aggregate exposure. This increased discipline at the reinsurance level inevitably flows down directly into corporate insurance programs, impacting the protection available to businesses. For CPAs, the practical effect is straightforward: less potential volatility is absorbed by the insurance market, and consequently, more risk remains within the company.
The Balance Sheet Transfer: Reallocating Risk and Capital
The mechanics behind this market shift, while seemingly technical, have a clear and simple financial impact. Higher deductibles and self-insured retentions necessitate that companies must fund losses internally before any insurance policy responds. Aggregate limits and sublimits cap the total amount an insurer will pay in a given year or for a specific category of loss. Furthermore, exclusions systematically remove entire categories of potential exposure from coverage.
These features collectively transform insurance from a primary shock absorber into a form of excess capital or a secondary layer of protection. A company pays its insurance premiums, but it also commits to funding millions of dollars in expected losses and uncovered volatility. This funding must come from its operating cash, its available credit facilities, or its reserves. This new reality has direct implications for a company’s liquidity, its borrowing capacity, and the stability of its earnings.
Navigating the Mismatch: Strategic Advisory for CPAs
When the structure of insurance coverage no longer accurately aligns with a client’s actual exposure profile, the issue extends far beyond the realm of insurance policies. It becomes an integral part of the broader financial planning conversation. CPAs are often uniquely positioned to identify how this increased retained volatility impacts a company’s liquidity, its ability to secure financing, and its long-term financial stability.
The initial and most crucial step is to accurately rebuild the true cost of risk for the client. Premium payments are only one component of this cost. The actual retained losses, uninsured exposures, potential legal costs associated with uncovered claims, and the economic impact of operational disruptions can easily exceed the annual carrier invoice. If deductibles have risen or coverage definitions have narrowed, it is highly probable that the client’s internally funded loss layer has also expanded significantly.
Quantification of this expanded retained risk is the subsequent essential step. Many businesses now implicitly expect to fund a meaningful first layer of losses through their operating cash flow or reserves. This assumption should be explicitly modeled and understood. Stress testing a company’s liquidity under various loss scenarios, thoroughly reviewing covenant headroom in existing loan agreements, and evaluating how potential loss volatility could impact future financial forecasts are vital exercises. These analyses help to surface potential vulnerabilities before an unexpected event forces reactive and potentially damaging decisions.
Governance also plays a pivotal role in managing this shift. Implementing clear internal guidelines regarding acceptable retention levels, establishing robust reserving practices for expected losses, and defining disciplined claims funding processes can significantly reduce the likelihood of unexpected financial surprises derailing quarterly or annual results. Renewal discussions with insurers should move beyond a sole focus on premium cost and actively engage with policy definitions, sublimits, and aggregate clauses to ensure a stronger alignment between the insurance coverage and the client’s actual business exposures.
A Financial Response to a Financial Problem
When insurance carriers absorb less volatility, businesses do not inherently become safer. Instead, they simply retain a greater proportion of the risk within their own operations. For CPAs, this fundamental shift transforms risk management from a background insurance matter into a core capital planning issue.
Some clients passively allow this expanded retained layer to operate without formal structure. Losses impact cash flow as they occur, and insurance protection is only accessed after a significant deductible or retention threshold has been met. In this model, retained volatility remains reactive and largely unstructured, leading to unpredictable fluctuations in financial performance.
Other clients are choosing to formalize what has effectively become their risk management strategy. Through mechanisms such as self-insurance programs, captive insurance companies, or other alternative risk transfer structures, they intentionally hold potential loss dollars within a governed financial vehicle. This contrasts sharply with allowing these potential losses to flow unpredictably through their operating results. This deliberate approach allows retained risk to be modeled, reserves to be funded with foresight and intention, and strategic decisions to be made about which risks are most appropriate to retain within the enterprise.
This distinction is critically important in advisory work. When a client carries risk accidentally, the response to a loss is typically reactive and potentially disruptive. However, when risk is carried deliberately and strategically, capital is allocated with purpose, and the company is better prepared to absorb and manage the associated financial implications.
The commercial insurance market in 2026 presents a landscape characterized by a thinner layer of traditional protection sitting above a larger, retained core of risk. CPAs who proactively recognize and address this fundamental shift are exceptionally well-positioned to help their clients align their risk funding strategies with their broader financial objectives. By doing so, they can help protect critical liquidity, restore financial discipline to a portion of the balance sheet that now carries significantly more volatility than many businesses realize, and ultimately, foster greater financial resilience.
