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Hard and Soft Markets - Is there a good, succinct, explanation of ---

By Tiffany Harrison,2014-05-13 03:31
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Hard and Soft Markets - Is there a good, succinct, explanation of ---

    Hard and Soft Markets

Hard and soft markets are a part of the legendary “insurance market cycle”, are a function of

    supply and demand, and are exacerbated by statutory accounting procedures within the insurance

    industry.

    In a “soft market”, insurance companies (the underwriters) are eager to write new business and to hold onto existing business; and are likely to offer coverage improvements and/or reduced

    premiums.

A Soft Market:

Generally intensifies over time. Starts when carriers recognize that they have improved their

    results, achieved their profit goals and know that if they write more volume, they should be able

    to make a higher return if they can hold their expenses reasonably constant, anticipate cost

    increases (inflation, actual cost of claims and claims adjustment costs) and “simply” add more written premium to the equation. Each time a “soft market” begins management will always feel

    that they will not make the same mistakes that were made in the past as they will not make bad

    decisions. In theory, the change from hard to soft markets out in a controlled fashion and some

    carriers can be extremely successful at the outset. The problem occurs when this phenomena

    takes on a life of its own and more and more carriers feel the same pressure to increase volume.

    The constant then becomes the amount of written premium that is out there to write. Even with

    an expanding economy, the amount of risks and insureds is generally finite. What happens then

    is the pricing gets lower and companies do not make enough net income, thereby increasing the

    combined ratios to an unacceptable level. Some carriers may get concerned that if they don’t cut

    prices even more, they will lose market share. The spiral continues until there is no more room

    to cut prices and the “hard market” starts. There is usually a severe catastrophe connected with

    the end of this market acting as a catalyst or “the last straw” to make the change.

In a “hard market”, insurance companies will often increase premiums and take back some of the

    coverage enhancements they provided during the soft market.

A Hard Market:

Usually intensifies immediately. There is a very short period of testing the impact of rate

    increase before most carriers implement a philosophy of pricing risks at “what the market will

    bare.” Hard markets can come from a variety of reasons. The hard market of 1985-87 was a

    capacity market. Results were so bad that companies literally had to shed accounts because they

    didn’t have the Policyholders’ Surplus to support the writing of any more business. With the

    increase in price that individual accounts were getting, carriers had to shed accounts to keep

    other accounts. This was a really bad situation for certain insureds, especially those with “tail”

    exposures since these were the accounts that were cancelled first. The hard market we are now

    leaving, 2000-04, was caused by underwriting. Accounts that did not have good loss ratios were

cancelled or had incredible price increases, while profitable accounts received “healthy” price

    increases. There was no surplus problem so carriers could write as much business as they

    wanted. They were just extremely selective in what they wrote. The theory here is the hard

    market will make the carriers profitable again. It then continues into a desire to write more

    premiums when you are profitable. Then shift up to a “soft market”. That is about where we are

    now.

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