What is a Hard Market and How They Affect Premiums
Insurance is cyclical
The business of insurance is cyclical. Which means, much in the way the economy flows, the insurance market experiences highs and lows; or in industry terms, the insurance market fluctuates between being hard and soft.
Due to a number of factors, we're currently experiencing a hard market.
Though the pandemic has caused additional challenges, several compounding events occurring prior to the pandemic has lead to the tightening of commercial coverage lines. For the past 10 consecutive quarters insurance premiums have been steadily increasing, with the fall of 2019 being the true start of the present hard market.
Insurance providers operate at narrow margins in order to remain competitive. To be sustainable, properly managing their underwriting portfolio is essential. When insurance companies are unable to profit at the price they are charging for coverage, they attempt to improve profitability by thoroughly reviewing current and new risks, raising premiums, lowering limits, tightening underwriting guidelines and restricting coverage through exclusions. In some scenarios, providers exit the market entirely or severely reduce their capacity, which is what we are experiencing in segments of transportation and healthcare, among others. The market tightening is the market correcting, as insurance companies address profitability.
Current industries most impacted by hard markets
- Commercial Auto
- General Liability
- Umbrella and Excess
- Commercial Property
- Directors and Officers
Not all lines of business are tightening, workers’ compensation for example, remains relatively soft. Cyber Liability insurance has been relatively soft, but is a line of business expected to endure challenges as more cyber breaches occur from COVID-19 telework exposures and other technological social shifts globally.
It is important to note, we are yet to approach one complete market cycle. The challenges of the hard market are likely to stay for the remainder of 2020. There seems to be mixed perspectives on when the market will begin to soften, however most are indicating well into 2021, with the more pessimistic, or best practices outlook suggesting a two to four year trend.
Insurance providers generate revenue through:
- Underwriting profit
- Investment income
Historically low interest rates resulting in lower returns have placed heightened pressure on more underwriting profit. To improve underwriting return on equity (ROE), companies are restructuring portfolios and rates, causing the hard market. Negative economic impacts from COVID-19 have magnified these efforts.