Soft or hard market, what lies ahead

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Courtesy of Waste Advantage Magazine

The past three years for the U.S. economy have been some of the worst in recent memory. Companies have struggled for survival resulting in layoffs, acquisitions, bankruptcies, restructuring and, in many unfortunate cases, the closing of shop doors. This trend has not been lost on insurance carriers, and is one of the primary reasons we are currently experiencing a “soft market.”

“Soft Markets” occur when there is an excess of capital base, insurance carrier profits are up and fierce competition between the various insurance carriers exists. Factors such as these cause rates to drop and expanded coverage terms to become available. This is the current condition in the insurance marketplace.

“Hard Market” is when there is a lack of capital, insurance carrier profits are shrinking (despite higher premiums) and the competition between carriers is less aggressive. In a hard market, companies looking for a policy might have a harder time obtaining coverage as the carriers can afford to be more selective.

Soft insurance markets are very beneficial for the policyholders as it means premiums continue to go down and the competition between interested carriers becomes more aggressive. The carriers battle it out in the form of coverage terms and reduced rates. In theory, incumbent carriers should be in a prime position to retain existing clients for the renewal of a policy. Oftentimes, the incumbent carrier will ask the agent for “last look” if they are made aware of competition from another carrier. This means they have offered their terms to be presented, but if there is a chance they might lose the business, they want to have the opportunity to sharpen their pencil one more time in a last ditch effort to retain it.

If the account is being marketed and the incumbent carrier is aware of this, and the actual sustained losses were not catastrophic, the incumbent carrier might only apply a slight increase to the renewal thinking that they it will not be enough of an increase to drive their client away. This, however, can work against them if another carrier is interested in the account and there is a reasonable explanation for why the loss occurred, such as poor winter driving conditions or other such circumstances out of the immediate control of the policyholder. This will also hold true if the policyholder has taken action to correct a similar accident from happening in the future, such as hiring a Safety Director, changing operating practices, etc.

Additionally because the competition is so fierce and because so many policy holders continue to struggle paying premiums (even though the economy has begun to very slowly show signs of life), none of the carriers want to be the first to stop the declining rates and begin to level things out or implement rate increases for fear that they will drive business from their books directly into the hands of their competitors.

How Rates Are Formulated
Insurance carrier capital is driven by items such as the loss experience their policyholders have, investment returns, the cost of reinsurance and expenses. In both hard and soft market conditions the cost of reinsurance is heavily involved. In the same way you purchase insurance to protect your company, insurance carriers purchase insurance to protect themselves. The cheaper the cost of their insurance, the cheaper they are able to offer terms to their policyholders. Essentially it is risk transfer, and the more risk they can transfer over to reinsurance, the more they can potentially take on themselves. In the current economic conditions, it was estimated that there would have to be an “event” or series of “events” in excess of $50 billion for the market to go from soft to hard.

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