As with many industries, the insurance industry goes through cycles where it shifts between what are known as “hard” and “soft” markets. As an insurance consumer, it is helpful to understand these cycles and how they affect your insurance rates as well as your purchasing options.
To better understand the industry cycles, let’s start by talking about what is meant by a soft market. Generally, a soft market happens when the insurance industry is profitable and companies have access to capital. The result is that during a soft market, companies are usually seeking to grow and expand their market share, leading to significant competition between companies. This increased competition means consumers have more purchasing options. Specifically, the characteristics of a soft market in the insurance industry include:
- Lower and more stable insurance premiums
- Broader coverage
- Relaxed underwriting criteria, which means underwriting is easier
- Increased capacity, which means insurance carriers write more policies with higher limits
- Increased competition among insurance carriers.
While a soft market can produce significant benefits for insurance consumers, there are times when insurers face tougher market conditions. This is generally the result of increased claims/payouts and/or economic downturn. In a hard market, there’s less desire for growth, as companies attempt to compensate for the losses they experienced during a soft market. To do this, companies usually seek to reduce their risk threshold and implement stricter underwriting standards. 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, which can significantly lessen coverage options.
The specialized industry knowledge of your insurance broker can help you to navigate a hard market and keep your insurance rates as low as possible. The good news is that industry cycles are like a pendulum that will eventually swing in the opposite direction. When companies have mitigated their risks enough to increase their access to capital, they will once again seek to grow and engage in competitive strategies that will stabilize and/or lower rates and result in increased purchasing options.