WHY is it a “Hard Market”?
By now you might have heard that in the always cyclical insurance industry, this year has marked the return of a ‘hard market.’ Also called a seller’s market, a hard market essentially boils down to a more difficult proposition for insureds: premiums are higher, underwriters have less appetite for taking on new risks, and there’s less competition among insurers for new business.
Although you may not have realized it, we’ve just come to the end of one of the longest soft markets in recent memory. That is, conditions have been extremely favorable for buyers of insurance over the past several years.
What changed? Several conditions have contributed to the current situation:
Claims costs: Claims continue to increase in both frequency and severity every year, and settlement verdicts for bodily injury continue to rise as well. Oddly, improvements in medical care are driving this change as well, since more people are surviving accidents that would have been fatal just a few years ago. While this is good news overall, it involves protracted medical care and corresponding higher claims costs.
Catastrophic losses: All the mega-hurricanes and wildfires that have made headlines over the past several years have one thing in common: They leave behind a wide swath of expensive losses to be remediated, another driver of higher coverage costs.
Underwriting: Those first two items have combined to produce substantial underwriting losses for insurers. The result is a circling of the wagons, and a much more cautious approach to taking on certain classes of business and lines of insurance.
Interest rates: All that premium money that insurers take in doesn’t just sit in a checking account. It’s reinvested so the interest earned can help to offset claims costs. Today’s historically low interest rates are great if you want to refinance your mortgage, but they also mean a lower return on those investments for insurers.
Reinsurance: Reinsurance is essentially insurance for insurers provided by other, specialized insurers. It’s a way for carriers to mitigate exposures they don’t want to fully retain by sharing the risk. For all the reasons above, though, reinsurance is also becoming more expensive, and when your insurer’s costs go up, yours will also.
These are all longer-term trends, so the likelihood is that the hard market will be with us for some time to come. There are steps you can take to minimize the impact, though. We’ll cover those in the next post.
Questions about coverage for your home or business? Contact Consolidated Insurance.