Bargain coverage, often characterized by low-cost insurance policies with limited scope or high deductibles, is increasingly proving problematic for middle-market firms. These companies, typically with revenues between $10 million and $1 billion, face unique challenges that make inadequate coverage a costly misstep. Here’s why this approach is backfiring and its impact on these firms, based on recent insights:
- Inflation-Driven Coverage Gaps: Inflation has significantly increased replacement costs for assets, with 60% of middle-market firms reporting difficulties replacing covered assets within existing policy limits. Many policies, chosen for their low premiums, fail to account for rising inventory costs, property valuations, and labor shortages. As a result, 72% of firms are considering increasing coverage limits, but those who stick with bargain policies risk being underinsured, leading to substantial out-of-pocket expenses during claims.
- Underestimating Risk Exposure: Middle-market firms often operate lean, making them vulnerable to disruptions. Bargain coverage may exclude critical risks like cyber liability, where 52% of firms acknowledge needing more robust protection due to rising cybersecurity threats. Similarly, climate-related risks and supply chain disruptions are often inadequately covered, leaving firms exposed to catastrophic losses.
- Higher Deductibles and Financial Strain: To keep premiums low, many firms opt for higher deductibles, which can strain cash flow when claims arise. This is particularly challenging given rising financing costs and interest rates, which already pressure middle-market firms’ ability to manage payroll and expansion. Inadequate coverage forces firms to absorb losses, diverting funds from growth initiatives.
- Market Dynamics and Competitive Pressures: The insurance market is softening in some segments, with increased capacity and competitive pricing. However, bargain policies often come with restrictive terms or exclusions (e.g., for PFAS or certain cyber risks), which can lead to unexpected claim denials. Middle-market firms, unlike larger corporations, may lack the resources to negotiate tailored coverage, exacerbating the impact of these exclusions.
- Long-Term Cost Implications: While bargain coverage saves on upfront costs, it can lead to higher long-term expenses. For instance, 62% of firms affected by inflation have raised prices to offset losses, potentially harming competitiveness. Additionally, underinsured firms face prolonged recovery times after losses, disrupting operations and eroding market share.
Recent Context and Impact: Reports from 2022 to 2025 highlight that middle-market firms are navigating a complex landscape of inflation, supply chain issues, and rising claims severity. For example, Chubb’s surveys indicate that while these firms posted record gains in 2023, inflation and coverage gaps remain persistent concerns. The push for cost-cutting through bargain policies often backfires when firms face unexpected losses, particularly in high-risk areas like cyber and property damage.
Recommendations: Middle-market firms should work closely with brokers to reassess coverage limits and terms, prioritizing comprehensive policies over short-term savings. Regular asset valuations, especially in inflationary periods, and investments in risk management (e.g., cybersecurity protocols) can mitigate exposure. As the insurance market evolves, firms must balance cost with adequate protection to avoid the financial fallout of being underinsured.
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