As we write this in 2021, we are in a hard insurance market. This article outlines the difference between hard and soft markets, factors driving a hard market, what employers should expect from a hard market, and how you can respond and navigate the shifts in the market.
The Insurance Market Cycle: Hard vs. Soft Markets
The commercial insurance market is cyclical in nature, fluctuating between hard and soft markets.
These cycles affect the availability, terms and price of commercial insurance, so it’s helpful to know what to expect in both a hard and soft insurance market.
What is a Soft Insurance Market?
A soft market, which is sometimes called a buyer’s market, is characterized by:
- Stable or even lowering premiums
- Broader terms of coverage
- Increased capacity
- Higher available limits of liability
- Easier access to excess layers of liability
- Competition among insurance carriers for new business
What is a Hard Insurance Market?
A hard insurance market, which is sometimes called a seller’s market, is characterized by:
- Increased premium costs for insureds
- Stricter underwriting criteria
- Less capacity
- Restricted terms of coverage
- Less competition among insurance carriers for new business
During a hard market, some businesses may receive conditional or nonrenewal notices from their insurance carrier.
What’s more, during hard market cycles, insurance carriers are more likely to exit certain unprofitable lines of insurance.
In what was one of the longest soft markets in recent years, businesses across most lines of insurance enjoyed stable premiums and expanded terms of coverage for decades.
While the commercial insurance market hardened for a short period of time after the terrorist attacks of Sept. 11, 2001, the last sustained hard market occurred in the 1980s.
However, after years of gradual changes, the market is firming, leading to increased premiums and reduced capacity.
Factors Driving a Hard Insurance Market
A number of different factors affect insurance pricing, but the following are common contributors to the hardening market:
Floods, hurricanes, wildfires and similar disasters are increasingly common and devastating.
Years of costly disasters like these have compounded losses for insurers, driving up the cost of coverage overall, especially when it comes to commercial property policies.
Claims are increasing in both frequency and severity year over year.
One reason for this is that settlement verdicts for bodily injury claims are steadily rising. Attorneys are more inclined to take claims to trial.
This extends litigation and significantly raises the cost to defend a claim.
Additionally, advances in health care have made treatment more effective, and people are living longer, fuller lives even after a serious accident.
While this is a positive trend, it has had an impact on compensatory damages and benefits.
Inconsistent Underwriting Profits
Underwriting profits refer to the difference between the premiums an insurer collects and the money it pays out in claims and expenses.
When an insurance company collects more in premiums than it pays out in claims and expenses, it will earn an underwriting profit.
Conversely, an insurance company that pays more in claims and expenses than it collects in premiums will sustain an underwriting loss.
An insurance company’s combined ratio after dividends is a measure of underwriting profitability. This ratio reflects the percentage of premium dollar an insurance company puts toward spending on claims andexpenses.
A combined ratio above 100 indicates an underwriting loss. Insurance companies generally do not generate profits from their underwriting operations. In the past 10 years, the commercial insurance industry has only had a combined ratio under 100 four times.
Mixed Investment Returns
Insurance companies also generate income through investments. Commercial insurance companies typically invest in a variety of stocks, bonds, mortgages and real estate investments.
Due to regulations, insurance companies invest significantly in bonds.
These provide stability against underwriting results, which can vary from year to year.
When interest rates are high and returns from other investments are solid, insurance companies can make up underwriting losses through their investment income. But when interest rates are low – like they currently are – insurers must pay close attention to their underwriting standards and other investment returns.
The economy as a whole also affects an insurance company’s ability to write new policies. During periods of economic downturn and uncertainty, some businesses may purchase less coverage or forgo insurance altogether.
A business’s revenue and payroll, which factor into how premiums are set, may decline.
This creates an environment where there is less premium income for insurers.
The Cost of Reinsurance
Generally speaking, reinsurance is coverage for insurance companies.
Carriers often buy reinsurance for risks they can’t or don’t wish to fully retain, including those for severe weather events like hurricanes and wildfires.
It’s a way for primary insurers to protect against unforeseen or extraordinary losses.
As a result, reinsurance helps to stabilize premiums for regular businesses by making it less of a risk for insurance carriers to write a policy.
However, reinsurers have exposures to many of the same events and trends that are affecting insurance companies.
For 2021, reinsurance is becoming more expensive to obtain, which is reflected in the overall cost of insurance for business.
How Can You Respond to the Market
The following are strategies you should consider to help navigate shifts in the market:
Review Your Insurance Program
Above all, check that your policies account for your business’s greatest exposures.
An understanding of your coverage ensures you’re not overlooking any exclusions and will help you secure the right policy for your operations.
During a hardening market, it may be necessary to make adjustments to your policies.
However, those adjustments shouldn’t come at the expense of the coverage you need.
Assess Your Risk and Bolster Risk Management
Doing so makes your business more attractive to insurers.
Your insurance advisor can also help you review existing policies and procedures, and make suggestions on ways to secure favorable quotes.
Know Your Loss History
In a hard market, underwriters will be especially critical when reviewing loss trends.
Be prepared to explain the factors contributing to a specific loss and the steps you’ve taken to mitigate future losses.
Budget Wisely and Plan Ahead
In some cases, premium increases are unavoidable, and organizations should be prepared.
Businesses should budget accordingly and take insurance costs into account alongside their other normal expenses.
Work With The Right Insurance Advisor
During a hard insurance market, it’s vital to have a certified insurance professional advising your business.
Be sure to partner with an advisor that has strong carrier relationships and knowledge of your industry.
Looking for a partner? We can help. Contact a Risk Advisor at O’Neill Insurance today.
Communicate With Your Broker Early and Often to Determine How the Hard Market Will Affect Your Business
Starting the renewal process early can give your broker more time to secure the best coverage for your business.
Business owners who proactively address risk, control losses and manage exposures will be better prepared for a hardening insurance market than those who do not.
Work with an O’Neill Insurance advisor today to help prepare your business for changes down the road.