In the insurance industry, market cycles play a pivotal role in shaping pricing, coverage availability, and underwriting standards. Understanding these cycles is essential for insurance professionals, businesses, and consumers. Let’s review the different insurance market cycles, focusing on the two most extreme, soft and hard markets.
What are Insurance Market Cycles?
Insurance market cycles refer to the alternating periods of soft and hard market conditions within the insurance industry. These cycles are influenced by a multitude of factors, including economic conditions, catastrophic events, regulatory changes, and the overall supply and demand dynamics in the insurance marketplace.
Soft Market
A soft market is characterized by ample insurance capacity, intense competition among insurers, and relatively low premiums. During this phase, insurance buyers often benefit from a wide range of coverage options, competitive pricing, and favorable underwriting terms. Insurers may be more willing to take on risks and offer broader coverage to attract customers and gain market share.
For businesses and individuals seeking insurance coverage, a soft market presents opportunities to secure comprehensive protection at affordable rates.
Standard Market
Although not always discussed, we spend roughly 60% of the time in an insurance market that is somewhere cycling between a soft and hard market. This cycle provides us with a broad appetite for risks and stable premiums.
Hard Market
A hard market signifies a period of reduced insurance capacity, stricter underwriting standards, and higher premiums. Insurers may become more selective in the risks they underwrite, leading to limited coverage options and increased scrutiny during the underwriting process. Factors such as rising catastrophic losses, low investment returns, regulatory changes, and social inflation can contribute to the hardening of the insurance market.
During a hard market cycle, businesses and individuals may face challenges in obtaining affordable coverage, especially for high-risk or catastrophe-exposed risks. It becomes imperative to implement robust risk management practices, explore alternative insurance solutions, and engage in proactive communication with insurers and insurance brokers to navigate through the challenges effectively.
Insurance Market Cycles in terms of premium increases
Breaking insurance market cycles down into their most basic terms of premium increases, the impact is as follows;
- Soft Market – Decreasing Premiums
- Standard Market – Small to Moderate Premium Increases
- Hard Market – Larger Premium Increases
How often do these various insurance markets occur?
In the last 40 years we have experienced three hard markets; 1985 to 1987, 2001 to 2004, and 2019 to current and one soft market from 2007 to 2010. The rest of the time is spent in between cycling between soft and hard markets.
Conclusion
Insurance market cycles are an inherent part of the insurance industry, influencing pricing, coverage availability, and risk management strategies. By understanding the nuances of soft and hard market conditions and adopting proactive risk management approaches, businesses and individuals can navigate through market cycles effectively, optimize insurance coverage, and protect against unforeseen risks.
Questions?
Please feel free to reach out to me or anyone on our staff with any questions about the current insurance market. We believe in being upfront and honest with our clients and providing them with as much information as possible.
John Dumbaugh, Managing Partner