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What is the Hard Market/Soft Market Insurance Cycle?

Author: Nancy Germond

The insurance industry is a cyclical industry, and a key characteristic of insurance is what insurance professionals call the hard or soft insurance market. Today's newer agents have never navigated a hard market. Understanding the cyclical nature of our industry can help agents manage the problems associated with today's hard market, and explain why premiums are rising, carriers may restrict coverage and clients may face higher deductibles and retentions.

The illustration below outlines the major differences between a hard and soft market. 


Causes of Insurance Market Fluctuations

There are several reasons insurance markets fluctuate. These can include the following.

  • Economic conditions – When interest rates are low, insurers don't earn as much interest as they could when interest rates are higher. Therefore, they must rely on their underwriting successes to ensure they're developing enough premium to cover loss costs and other expenses. Additionally, increased costs on auto parts, longer wait times for vehicle parts and repairs, and other inflationary issues such as social inflation in jury verdicts also impact rates.
  • Payroll and revenue – As we experienced during the recent COVID-19 pandemic-related layoffs, decreased payrolls and revenue mean less premium for insurers, especially for those that write workers' compensation coverage. This can hurt insurers profit margins, as well.
  • Catastrophe losses – The availability of reinsurance is critically important to insurers. Without adequate reinsurance, front-line insurers may lose or restrict their underwriting appetite in regions impacted by natural catastrophes.

According to Munich Re, the largest global reinsurer, three issues impacted their underwriting profitability in 2022.

  1. The  state their “new normal" is predicting weather-related losses projected in amounts of more than U.S. $100 billion annually.
  2. Flooding, catastrophic wildfires and other weather-related losses are increasing greatly.
  3. Climate change “developed with full force." In the future, climate change “will lead to more frequent and more intense weather-related events," according to one Munich Re official. The insurance industry must “be prepared for such development," this official continued, including rainfall intensities, which we've recently seen in the California bomb cyclone.

While Munich Re is one reinsurer, reinsurance rates rose sharply, projected by Fitch Ratings at “well over 10%" for January 2023 renewals. While these increases will be in regions “…worst affected by natural catastrophe events in 2022" according to Fitch, it also predicts “tighter terms and conditions in 2023."

Navigating the Hard Market

Navigating any big market swing is hard. Just ask egg producers right now, who are facing Avian flu and rising transportation costs impacting pricing. The insurance industry, while different from commodity markets, is also deeply impacted by market forces.

How should agents navigate the hard market? Here are a few tips.

  • Make sure your application is complete the first time.
    • Properly complete applications, including full and accurate information.
    • Attach three-to-five-year loss runs or provide a letter of no losses from the incumbent and historical insurers.
    • Attach schedules to provide underwriters more detail.
    • Include a list of the key coverages you're seeking.
    • Include a narrative about the business and a link to its website and other marketing materials that might influence the underwriter.
    • Add comments on your relationship to the insured, including if it's a prospect or you're competing on the account.
  • Know your markets and continue to develop relationships with underwriters. While many underwriting rejections occur today based on algorithms, if you have a good relationship with your underwriters, you may be able to obtain better than average results for your clients. Especially with those clients in cat-exposed areas or with a few losses, your relationship with the deciding underwriter may help you place or keep a challenging account.
  • Many of your employees will have never worked in a hard market. Assign a mentor agent or customer service representative to assist newer agents to better navigate this market.
  • Develop a standard outline that all your employees can customize to explain why premiums are up and underwriters are asking more questions, because insureds facing a ten-page application will often balk.
  • Prepare for a tougher renewal. Where you may have been safe a few years ago with a month lead time on a commercial renewal, in today's world, carriers are demanding more and asking more questions. Additional information requests or inspections will delay results, so consider a longer lead time on all renewals.
  • Highlight your insureds' loss control efforts. Companies that embrace strong risk management tactics or employ an in-house risk manager will fare better in this tough market. Carriers are increasingly focused on underwriting profitability, and one loss in today's environment of runaway verdicts can keep even the experienced underwriters or business owners up at night. If your submission highlights your insured's strengths, you make the underwriter's job easier and increase the likelihood of a “yes." 
  • Consider suggesting your insured to prepare a video showcasing the organization's risk manager walking the underwriter through their risk management program, or showcasing one of their facilities. Videos convey in pictures what would take paragraphs to communicate, paragraphs the underwriter may never more than glance at.
This quote from a risk management consultant nicely sums up the submission process. “Sometimes a submission is putting a bow on a quality package and sometimes it is about putting lipstick on a pig. Drawing the underwriter into the story to [build] a desire to write the account is an important step in the process."

For tips from Bill Wilson on selling insurance in a hard market, read this excellent article. 

With a little work, you can assist your insureds and potential clients through today's hard insurance market and distinguish yourself from your competition.


Last Updated: January 27, 2023


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