The insurance industry has always been cyclical, going through periods of “soft” and “hard” market conditions that can last several years. Today’s agents have been thrust into what the insurance industry has historically called a “hard market.” However, this market cycle seems a bit different than those in the past and perhaps may not soften as quickly as we’ve seen in some cycles.
Some of the factors complicating this market cycle are increased inflation, supply-chain disruption during COVID and issues with long-standing, insufficient, insurance-to-valuations on both personal and commercial property. Further complicating the cycle was a pushback against requested rate increase requests by insurers to their departments of insurance in some states.
As a result, the insurance industry is facing some of the hardest market conditions in years. According to the Liberty Mutual 2024 Agent-Customer Connection Study, 83% of agents say this is the hardest market they can remember seeing.
Characteristics of soft and hard markets in insurance
To understand the challenges agents face in hard markets, let’s first discuss the characteristics of a soft market. These characteristics include the following.
- Ample market “capacity” – the amount of insurance or reinsurance backstops available in the insurance market.
- Relaxed underwriting standards.
- More insurers offering solid terms and conditions.
- Lower premiums for insureds.
- Generous policy terms and conditions.
In contrast, here are the characteristics of a hard market.
- Less market capacity
- Stricter underwriting guidelines and more underwriting declinations and non-renewals.
- Fewer carriers or carriers active and taking risk in the marketplace as we see in some states like Florida and California.
- Higher premiums, compelling more experienced insureds to take higher deductibles or self-insured retentions.
- Restricted coverage options, including restricted terms and tighter conditions in policy language, for example, limited full coverage choices for roof damage.
Why the market shift?
Before the market started hardening in the last few years, producers experienced a long period of more relaxed underwriting and solid terms and conditions. What changed to produce this dramatic market shift?
Here are some of the reasons for the hard market trends.
Economic factors
When interest rates are low, insurers don’t earn as much interest income to offset underwriting losses. Even with today’s higher interest rates, insurers are still facing financial losses. Long wait times on parts, higher repair costs as more sophisticated vehicles enter the auto market, parts and labor price spikes, and unexpectedly high jury verdicts created a perfect storm. This storm created abrupt rate increases and decreased underwriting appetite. In short, since COVID, inflation has been a major factor pushing rates higher.
Catastrophic losses
Weather is increasingly hitting the reinsurance market – the insurers that stand behind the primary carriers, bailing them out after widespread weather losses. As reinsurance rates increase and reinsurers’ capacity shrinks due to negative loss ratios from weather and higher jury verdicts, reinsurance capacity decreases, and reinsurance rates increase.
Reduced competition
With fewer carriers seeking new and renewal business, insurers still embracing risk can charge more. That is the law of supply and demand.
Successfully navigating the hard market
Hard markets bring difficult headwinds, as agents, clients and carriers all feel the strain. Here are some tips that can help you succeed.
Rely on your relationships
Know your carriers and lean on the knowledge of your more experienced colleagues. Developing relationships with underwriters in both the standard market and with wholesale brokers can pay dividends.
That said, try not to take underwriting rejections personally. This cycle has hit even highly experienced producers who’ve worked years to build underwriting relationships. Try not to lose your temper as you face rejections.
Educate your clients
To learn more about how agents and customers are experiencing the hard market, read our new report: The Agent-Customer Connection: Gaps and Opportunities in the Hard Market
Research from Liberty Mutual and Safeco Insurance found that 62% of insurance customers say it’s important for their agent to educate them on the changing dynamics of the market, and 85% said it’s important for agents to review their policy coverages with them. Develop a standard script to explain to your insureds why their rates are increasing, and what steps they can take to reduce their premiums. This can include higher deductibles or improved loss reduction efforts.
Building strong relationships by educating and supporting your clients during this hard market will pay dividends throughout the life of your client interactions. Your clients will know that you’re a trusted advisor they can turn to in the good times and the bad times.
Seek out industry resources
Lean on your insurance trade association and carrier partners for hard market navigation tools such as those developed by the “Big I” and Safeco Insurance.
Ensure you send only complete applications
A pile of submissions litter underwriters’ desks and in-bins. Attach loss runs, complete supplementary applications before underwriters ask, or quickly return additional supplements. A thorough application rises to the top of most underwriters’ desks and inboxes in this market.
Carefully review policy language
Carefully review declarations pages on new business and renewals. All insurers may add new safeguards or warranties and may reduce coverage through sublimits or amending endorsements. More of your business will go to surplus lines carriers due to current primary market constraints. Surplus lines forms are often proprietary forms. This means policy wording and subsequent coverage terms probably don’t align with Insurance Services Office (ISO) forms. In fact, they will probably contain restrictions and exclusions not seen on ISO forms. Therefore, carefully review policy language and endorsements to alert your clients to any changes or limitations in coverage.
What Does the hard market mean for the future of insurance?
There is a lot of speculation among insurance professionals about the future of the insurance marketplace. With weather-related losses still rising and aggressive advertising emphasizing large personal injury settlements, it’s unclear when rates and terms will improve. However, according to a recent Fitch rating report, reinsurance rates may soften in 2025, which may help increase capacity and ease rate increases.
Similarly, primary insurers may have sufficiently increased rates so that carriers may experience slightly better profitability in 2025. That should create better terms, conditions and rates for your insureds.
Try not to let this hard market cause you too much stress. Cycles are cycles because they evolve over time. We’ve seen hard market cycles before, as all seasoned agents know, and we’ll no doubt see a softer market again as conditions ease.
No matter when the market cycle softens, you can benefit from this hard market by building stronger relationships with your underwriters, marketing reps and your clients.
