Hard market and soft market are terms you may have heard before and they generally are categorized this way due to premium trends on commercial insurance. We will discuss in more detail below but the main difference and what really dictates them are industry wide or catastrophic claims for insurance carriers across the board. In layman’s terms, a soft market has loosened underwriting restrictions and lower premium. A hard market is just the opposite. Currently the industry is in a Soft Market.
Soft Market:
- Lower insurance premiums
- Broader coverage
- Reduced underwriting criteria, which means underwriting is easier
- Increased capacity, which means insurance carriers write more policies and higher limits
- Increased competition among insurance carriers.
A soft market can affect a carriers’ bottom line due to lower rates. A carrier relies on a combination of insurance premiums and investments to make money as a company. This is an area to watch when carriers get downgraded by AM Best because it’s generally due to bad investments and bad decisions on what business to write.
Hard Market:
- Higher insurance premiums;
- More stringent underwriting criteria, which means underwriting is more difficult;
- Reduced capacity, which means insurance carriers write less insurance policies;
- And less competition among insurance carriers.
Are we moving towards a Hard Market?
Mother Nature and the effects of the economic downturn have been the main causes for change in the insurance industry over the last 18 months prompting some to think we are in or heading towards a hard market. In addition, there are two other areas that can affect business insurance premiums – payroll and revenue. As companies began experiencing a decrease in revenue, employees are let go. Both their payroll and revenue are now lower, which means a decrease in premium to the insurance carrier. This is another way in which the carrier is losing money due to the economic downturn.
What can we expect from Insurance Carriers during a Hard Market?
During a hard market, underwriting gets tougher and more stringent. Meaning they are not as likely to quote a business with low payroll or in a risky class code. With each year, underwriters are becoming more sophisticated. They are looking more closely at losses, safety records and financials. Those in the industry are seeing insurance carriers dig deeper into a company’s financials than in the past. Rates will vary from carrier to carrier and will depend on a business’s inherent risks, claims history and finances. This is why it is important to always being looking for the best price + carrier you can find on a regular basis. Whether that is every year or every couple years you should always make sure that they are earning your business. An independent agent who partners with several carriers can help make this task easier for you as a business owner.
What you can do in a Hard Market when you are seeing rates increase?
While you will most likely need to be prepared for some rate increases due to the insurance industry’s hard market, there are several things you can do to help minimize the impact until the cycle turns back to a soft market:
- Because the market and underwriters are becoming more restrictive, it is imperative that as a company you are more involved with your safety programs.
- Take a more active, strategic approach to managing your company’s risks and claim activity.
- Start your insurance renewal process earlier. Some carriers want at least 30 days to quote your business. Starting 60 to 90 days before your term ends can really help this process.
- Be even more cognizant of your company’s financials – most insurers are looking at whether bills are being paid on time and many carriers are using third party companies to conduct credit scores.