Every insurance professional with their finger on the pulse of broad market trends will likely have come across the terms ‘hard market’ of ‘firming of rates’ in recent conversations, business meetings, industry press, and so on. They’re the type of terms that people are often tentative about using. Why? They’re totally subjective and they rarely reflect conditions across all insurance lines. What one person might see as ‘hard,’ another might see as ‘soft’ compared to X years ago when X event caused a total storm in the financial markets. You get the picture. When used by individuals to describe market conditions, the terminology naturally reflects on personal experiences.
Despite that lengthy spiel on subjectivity, there seems to be a common consensus in September 2019 that the US commercial insurance market is ‘firming’ in certain areas after a long period of largely flat rates. In fact, some lines of business in certain areas of the US have entered into the realm of the ‘hard market’. So, what does that mean?
The insurance market is cyclical. Like a pendulum, it fluctuates constantly between a hard market and a soft market. The following are both definitions provided by the International Risk Management and Insurance society (IRMI):
Hard market - In the insurance industry, a hard market is the upswing in a market cycle, when premiums increase and capacity for most types of insurance decreases. This can be caused by a number of factors, including falling investment returns for insurers, increases in frequency or severity of losses, and regulatory intervention deemed to be against the interests of insurers.
Soft market – This side of the market cycle is characterized by low rates, high limits, flexible contracts, and high availability of coverage.
Soft market characteristics
In soft market conditions, insurance organizations often try to expand their market share. They enter growth mode, targeting prospects with cheap rates, attractive policy terms, and, when allowed, discounted coverage. In the most extreme cases (seen more so in less regulated markets around the world), the soft market resembles a bidding war, with everyone chiming in last minute to offer the cheapest deal on a risk. With all this buzz, insureds and their supporting brokers are encouraged to shop around, and as more companies move their business to insurance carriers with lower rates, the profits for the entire industry start to reduce. On top of that, when focusing on growth and price-driven risk transfer, insurers sometimes let slip on stringent underwriting, meaning loss ratios also start to rise. At some point, a correction to this unsustainable situation (reduced profits and rising loss ratios) is necessary and the market starts to harden.
Examples of current soft markets include:
- Workers’ compensation
Hard market characteristics
In a hard market, there’s less desire for growth and more of a restriction in the marketplace as insurance companies re-evaluate their books of business, their risk appetites, and how much capacity they want to present in the marketplace. In hard market conditions, underwriters often adhere to stricter standards in an attempt to correct any adverse loss ratios developed during soft market conditions. As a result, insurance rates often go up, the amount of limit carriers are willing to provide decreases, and the number of players in the market restricts. This makes it harder for insureds and their agents to find coverage options, which means the carriers that are offering coverage can push up their rates.
Examples of firming markets include:
- Catastrophic property insurance (California)
- Financial institutions insurance