Navigating a Hard Market

On March 24, 1986, Time Magazine’s cover article was titled “Sorry, America, Your Insurance Has Been Cancelled.” The article referenced the collapse of the U.S. commercial liability insurance market – principally associated with run-away inflation and the bursting of a historically high interest rate bubble. Today, we see this also impacting property insurance.

The U.S. insurance market finds itself again in trouble. In some ways the market dynamics appear similar at first glance to the 1980’s (e.g., inflation, nuclear claim verdicts, catastrophic claims, and natural disasters); however, these days there are altogether new headwinds affecting the U.S. insurance market. The consistent severity of insured catastrophe losses, combined with tighter insurance regulations limiting standard insurance companies’ ability to freely manage their rates and rules, has expanded the insurance crisis.

Simply stated, a hard insurance market is defined by continued high demand for insurance coverage with limited or reduced supply. The causes for the limited or reduced supply are manifold, but the net result is an upset from the status quo with insurance carriers focused on increasing rates, restricting coverage terms and conditions, and possibly raising deductibles and retentions for the insured. Typically, underwriting authority is transitioned to the management level, competition among carriers is limited as insurance companies retrench on their existing business, and insurance buyers find it more difficult to secure coverage at what they feel is a reasonable price.

Let’s look at this from the insurance company, an insurance buyer’s, and a broker’s perspective.

Carriers:

• Carriers return to underwriting basics: Evaluate rate, terms and conditions, insurance to value, and loss and claims history when quoting new or renewal business.
• Sometimes they need to deliver a hard message, but it’s important to be clear with the message to brokers and insureds to provide explanations for the actions taken.
• All underwriters have guidelines, and while all risks may appear to fit within one common box, there will always be opportunities for underwriters to deploy their critical thinking skills.
• Insurers have an opportunity to communicate, or in some cases re-educate, brokers and clients on the details of their risk appetite, coverage capabilities, and services.
• Look at all business with fresh eyes: In a hard market, there’s a renewed focus to adequately apply rate, terms, and conditions to make the book profitable, which benefits everyone in terms of the opportunity for the market to stabilize.

Insureds:

• In a hard market, underwriters will ask more questions. Insurance buyers are wise to begin gathering renewal data and reviewing prior insurance claims early with their brokers.
• Hard markets present many challenges for businesses from increasing insurance costs to potential restrictions in coverage terms. To achieve the best outcome for their business, it is critical that companies have an experienced broker partner with the knowledge and resources available to do the necessary work on their behalf.
• Consider all potential exposures. Insureds should start out not by looking at cost, but rather identifying the risks that their business faces. Then, they should look at the best method to address those exposures which could include purchasing insurance, retention of some or all of the exposure, or self-insuring the perils.
• Be able to “tell a story” on why their management, operations, and loss control are better, stronger, and more committed than others in their market. This shows carriers that they are a better risk.

Brokers:

• An insured and their broker should collaborate closely in securing coverage. Typically, it is the insured’s responsibility to articulate their needs and exposures, while it’s the broker’s responsibility to discuss strategy and communicate with the carrier.
• Brokers can help insureds develop a final submission package that meets the onerous requirements of a hard market and stands out among the rest.
• Focus on value, not just pricing. Brokers and insurers who succeed in a hard market are those who don’t just sell pricing to the client—they provide value.
• A broker with strong market relationships and a creative strategy will go a long way to alleviate much of the strain associated with the uncertainty of the hard market.

The insurance market is and will always be cyclical, but many things can be done to keep the cycles from being as extreme as they have been. The hard market is an opportunity to:

• Build and maintain strong relationships: In a hard market, insurance companies, brokers, and insurers must work harder to maintain strong relationships and support open communication. Strong business relationships cannot be taken for granted.
• Clear communication and timely service: The insurance company needs to be proactive in explaining any change in their risk appetite or underwriting criteria, be able to provide answers to your questions, and be clear as to their intentions on renewal pricing and terms.

Rising premiums, reduced capacity, and stricter underwriting can make the hard market cycle a difficult time for brokers, insureds, and insurance companies. But in meeting the challenges and demonstrating value, the marketplace can come out of it stronger and provide everyone greater stability.