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What brokers should be doing in a hard insurance market

What is the difference between a “hard insurance market” and a “soft insurance market”?

The insurance industry is known to fluctuate between hard and soft market cycles.

Hard insurance markets are characterized as having increased insurance premiums, reduced capacity for insurers to take on business (both for renewal business and for new business), more stringent underwriting criteria, reduced coverage, and less competition as some insurance companies withdraw from certain industry segments altogether.

A soft insurance market offers lower insurance premiums, broader coverages from insurance companies, relaxed underwriting criteria, increased capacity for insurers to take on business, and increased competition amongst insurance companies.

To summarize, a hard market is when there is a high demand for insurance but a lower supply of coverage available.

Until mid-2018, the insurance industry had spent just over a decade in a soft market. However, since the autumn of 2018 we have been in a hard market.

What caused this hard market?

Hard markets inevitably follow soft markets because risks unwritten at unsustainably low prices must eventually be offset with higher premiums. After a few tough years, the Canadian insurance industry has been operating at a loss across all lines. Growing claims costs have outpaced the money insurance companies can get back in premiums and investments.

There are a variety of factors that can influence the shift towards a hard market, including:

  • Increased frequency and severity of claims. When a large loss or series of losses results in billions of dollars in claims being paid, it affects the amount of business an insurance company can take on going forward.

In the last 10 years, Canada has seen some of its costliest natural disasters, including the 2016 Fort McMurray wildfires, 2013 floods in southern Alberta and Ontario, and the 2020 hailstorm in Calgary. In 2021, severe weather across Canada is estimated to have reached $2.1 billion in insured damages. On a global scale, 2017 saw up to $200 billion in insured damages with hurricanes Harvey, Irma, and Maria.

  • Low interest rates and return on investments. Insurance companies rely on both premiums and investment income to pay claims. When the interest rates fall, insurance companies will rely more on their premium income to cover the cost of claims.
  • Inflation’s impact on goods and services resulting in higher claims costs. People are seeing the impact of inflation in many aspects of their lives, and insurance is no different. The increased costs and reduced availability of products and labor are causing more expensive and drawn-out claims.
  • Years of low rates and premium reductions from competition between companies. This has resulted in existing policy premiums being inadequate for companies to maintain profitability.

How does the hard market affect insurance customers?

As a result of the hardening market, many insurance customers have experienced one or a combination of higher premiums, reduced coverage, and a more in-depth renewal underwriting process.

Some customers have been forced to find a new insurer when their current insurer has decided to not offer renewal of their existing policy. This can result in significant premium increases and in some extreme cases has left some customers unable to find adequate insurance coverage.

How long will it last?

It is difficult to predict how long each market cycle will last, and we don’t know if anyone can say for sure when we will see the end of this hard market.

Some classes of business, like property insurance, were quick to enter the hard market. They have started to plateau and are expected to continue that trajectory into this year. Other classes, like certain financial and professional lines, are expected to remain as is or continue hardening over the next year or two.

Ultimately, the end of the hard market will arrive when adequate rates are being consistently charged and insurance companies start taking in more profit than they are paying out in claims.

What can insurance brokers do in this hard market?

From the insurance broker perspective, you will likely need to be prepared for some rate increases, though there are steps you can take to help minimize the impact on your clients:

  • Start the renewal process or new business submission early. Give yourself an adequate amount of time to review and obtain all relevant information from your client, put together your submission, reach out to insurance companies, obtain any additionally requested information, and compare the quotes that come in.
  • Make sure your submissions are complete, contain all the required information, and are formatted in a way that is easy for the insurance company to review. Everyone’s workloads are high right now and response times can be long, anything you can do to make the insurer’s process easier and get your submission to the top of the pile will increase your odds of success.
  • Take a proactive approach with your client on their loss control procedures. Discuss annual rebuild cost appraisals, loss control inspections, and insurance company loss control resources. Anything to make your client stand-out from similar submissions will help.

Consider different coverage and deductible options. In the soft market, it was common to see low deductibles of $1,000 or $2,500. In the current market the client may be more comfortable increasing their deductible in exchange for some relief on the premium.

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