Navigating the Hard Market Insurance Cycle

The insurance market is cyclical; it goes between “soft” market conditions, “balanced” market conditions, and “hard” market conditions. Soft markets tend to be driven by insurance companies fighting for market share and are good for insurance buyers because premiums hold steady or decrease. During a hard insurance market, insurance companies limit their risk appetites and capacity to assume risks, which leads to increased rates and coverage becoming more difficult to find.

Consumers are Faced with a Hard Insurance Market in Ontario

In Ontario, and across the country, we are in the midst of a hard market for business insurance. Many pundits believe that it will remain a hard market for a while, certainly continuing throughout 2021. It is a challenge for us as insurance brokers as it is more difficult obtaining reasonable insurance terms for our clients. Of course, it is particularly challenging for our clients as they are faced with increased premiums at probably the most inopportune time.

What is a hard market in insurance?

Insurance companies assess their ability to pay out future claims and rely on two factors of funds: premiums charged and investment income. When investment income is low, insurance companies can not offset the impact of increasing claims costs. They then look for premium increases to remain adequately capitalized to meet their claims obligations and comply with regulatory liquidity ratios.

Insurers have to ensure they are financially secure to pay out claims and protect clients with measures that result in harder to obtain insurance coverage. This results in fewer companies competing for market share thus increasing premiums.

Some measures insurance companies take to make sure they have available funds during a hard insurance market are:

• Stricter underwriting standards
• Reduce the number of new policies
• Increase premiums
• Restrict coverages

What to do during a hard market

If you notice changes in your premium or coverages during the renewal process, there are several things you can do to help lessen the impact of the hard market.

Take advantage of insurance discounts and savings opportunities

There may be some risk management opportunities your business can implement that decreases your likeliness of a claim. Ask your insurance broker if you qualify for any savings opportunities.

Take your time and review your policy

Working with an insurance broker is important to understand your coverages. A hard market is an excellent time to review your coverage alongside your broker to ensure you aren’t overinsured or underinsured.

What to do after a hard insurance market

In time, the impact of higher rates will improve underwriting results for insurance companies and a healthy insurance marketplace is good for the consumer. When insurance companies are financially healthy, they are more competitive for market share; returning to a “softer” market.

In a “soft” market, business owners should expect lower premiums, even without a reduction in their risk. 

Business owners can lay the groundwork during a soft market to prepare for the next downward cycle to a hard market. Even in the face of reducing insurance costs in a soft market, they must continue to invest time and resources in loss control and risk management.

The soft market reduction in pricing is most welcome but reliance on that trend to continue can set a business up for a shock when the market begins to harden again.

It's important to take advantage of the opportunity to get ahead by proactively addressing losses and risks. When insurance prices begin to climb, those businesses that have taken the initiative to address losses and mitigate risk will see modest increases in premiums, whereas those that simply rode the market without working to reduce risk will have a harder time placing coverage and won’t be offered the most competitive rates.

Even if the market doesn't harden or hardens slowly, a business with effective loss control and risk management initiatives will always pay less.

What is clear is that risk management, loss control, and safety continue to be crucial to the success of any business insurance package, regardless of market conditions. Now is a good time to evaluate your business’ risk management plan as a whole to ensure your business can attain favourable pricing regardless of market conditions.