Understanding Hard and Soft Insurance Markets
Factors influencing pricing and coverage and how you can help guide your company through our current hard market
By Matt Yost
Insurance markets are dynamic, and their pricing fluctuations impact both businesses and individuals seeking coverage. The concepts of hard and soft markets reflect the pricing trends in the insurance industry. I will delve into the factors that contribute to these market conditions, their effects on insurance buyers, and what business owners can do to mitigate the effects of a hard market on their bottom-line.
HARD MARKET VS. SOFT MARKET
At its core, the difference between a hard market and a soft market lies in the pricing offered by insurance carriers to their clients. In a hard market, insurance rates are on the rise, leading to higher premiums for policyholders. Conversely, a soft market is characterized by reduced rates, resulting in lower premiums for buyers. These market conditions directly impact the affordability and accessibility of insurance coverage for businesses and homeowners.
FACTORS INFLUENCING HARD AND SOFT MARKETS
1. Insurance Analytics and Predictive Underwriting: Over the past two decades, the insurance industry has embraced data analytics and predictive modeling to assess risks and determine appropriate pricing. By analyzing claim data, risk characteristics, and other factors, insurance companies can segment businesses and individuals, tailoring premiums based on risk profiles. This approach has led to more accurate pricing and reduced market volatility.
2. Economic Factors: While insurance markets are influenced by broader economic conditions, such as the stock market’s performance, their connection is not always direct. Insurance companies primarily generate profits through investment returns rather than underwriting results. In a bear market, insurance companies may seek alternative revenue sources, leading to higher premiums. However, economic factors alone do not solely dictate market conditions.
3. Weather Patterns and Catastrophic Events: Weather events and catastrophic occurrences play a significant role in shaping insurance markets. Increasingly frequent and severe weather patterns, such as hurricanes, tornadoes, and wildfires, impact insurance carriers’ exposure to risk. Insurance companies respond by adjusting rates to compensate for potential losses. Weather patterns can have a more substantial impact on insurance rates than the overall economic climate.
According to the NOAA National Centers for Environmental Information (NCEI), there have been 24 separate weather and climate disasters through September 2023, with losses that exceed $1 billion in the United States.
4. Legislative and Legal Environment: The legal and legislative environment in which insurance companies operate significantly influences market conditions. Jurisdictions that are less business-friendly may witness larger jury awards, known as nuclear verdicts, for liability claims. These sizable payouts can lead to increased rates as insurers strive to cover potential losses.
The legal landscape plays a vital role in determining the cost of insurance coverage. According to recent loss data from Advisen (a Zywave company), the median cost of a nuclear verdict increased from $20 million to $27 million between 2015 and 2020, representing a 35 percent jump.
“Nuclear verdicts have spun out of control and should concern every policymaker, business, and consumer because of the real-world impact on the price of everyday household products, services, and insurance. Moreover, nuclear verdicts can threaten the viability of a business,” said Harold Kim, president of the U.S. Chamber of Commerce Institute for Legal Reform and chief legal officer for the U.S. Chamber of Commerce. “While some might feel that a huge verdict is ‘sticking it’ to a business, the reality is that nuclear verdicts add uncertainty and layers of cost throughout our economy that we all pay and undermine the rule of law in the process.”
EFFECTS ON INSURANCE BUYERS
During a hard market, insurance buyers experience higher premiums as carriers aim to mitigate risks and recoup potential losses. Commercial clients, especially, may see coverage reductions, where insurers reduce policy limits or require clients to seek coverage from multiple carriers. This increased difficulty in obtaining desired coverage levels can place a financial burden on businesses. Conversely, in a soft market, buyers enjoy lower premiums and increased accessibility to coverage, leading to cost savings.
In our current market, certain lines of coverage, such as excess liability insurance, are experiencing the effects of a hard market. Reduced capacity from reinsurers and large verdicts in liability claims have led to decreased limits and increased rates for policyholders. The availability of coverage may be limited, requiring businesses to seek multiple insurers to achieve desired coverage limits. These challenges can result in higher costs and more complex insurance arrangements.
The insurance industry’s shift toward data analytics and predictive underwriting has brought stability and predictability to pricing. While economic factors and weather patterns impact market conditions, insurers’ investment returns and the legal environment play significant roles in determining insurance rates. Understanding the dynamics of hard and soft markets empowers insurance buyers to make informed decisions about coverage options, ensuring adequate protection while managing costs.
By staying informed and working closely with insurance advisors, businesses and individuals can navigate the insurance market more effectively and ensure adequate protection against potential risks.
Rate Forecast Predictions from Willis Towers Watson
PROPERTY | RATE PREDICTION: CHALLENGED OCCUPANCIES: +25% TO +40%; NON-CHALLENGED OCCUPANCIES: +10% TO +20%
• Pressure to obtain higher returns for deployment of catastrophe capacity/aggregate will drive premium increases for insureds while inflationary pressure, reinsurance optimization, and persistent scrutiny on valuation of assets remain.
AUTOMOBILE LIABILITY | RATE PREDICTION: +5% TO +10%
• 2021 AL segment combined ratio is estimated at 101.3.
• NHTSA puts the fatality rate for 2021 at 42,915, up 10.5 percent from 38,829 in 2020.
• Large auto verdicts: 300 percent increase over seven years in trucking claims.
• Distracted driving
GENERAL LIABILITY | RATE PREDICTION: -3 % TO +5%
• Liberal class action certification and a highly organized plaintiffs’ bar
• Desensitized jury pools & uncertainty around litigation in post-pandemic world
• Those with exposures materially impacted by inflation may find more flexible rate outcomes.
UMBRELLA LIABILITY | RATE PREDICTION: HIGH HAZARD/CHALLENGED CLASS: FLAT TO +15%; LOW/MODERATE HAZARD: FLAT TO +7.5%
• After the peak in 2020/21, pricing adequacy has attracted greater global capacity.
• Risk-specific (two-tiered) underwriting remains, with high hazard risks or lower attachment points yielding worse outcomes.
• Uptick in frequency of punitive awards
Source: https://www.wtwco.com/en-us/insights/2023/04/insurance-marketplace-realities-2023-spring-update
Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information.
