Concept of Soft and Hard Insurance markets

Hard Insurance market

A hard insurance market is characterized by a high demand for insurance coverage and a reduced supply. Insurers impose strict underwriting standards and issue a limited number of policies. Premiums are high and insurers are disinclined to negotiate terms.

In a hard market, there’s less desire for growth and more of a restriction in the marketplace as insurance companies re-evaluate their books of business, their risk appetites, and how much capacity they want to present in the marketplace. In hard market conditions, underwriters often adhere to stricter standards in an attempt to correct any adverse loss ratios developed during soft market conditions. As a result, insurance rates often go up, the amount of limit carriers are willing to provide decreases, and the number of players in the market restricts. This makes it harder for insureds and their agents to find coverage options, which means the carriers that are offering coverage can push up their rates.

• Catastrophic property insurance (California)
• Trucking
• Financial institutions insurance

Factors contributing to a hard market may include:

• Economic downturn/uncertainty.
• Financial market volatility.
• Shrinking insurance capital/decreased competition.
• Catastrophic events / Increased claim activity.
• Global events (e.g., pandemic, climate change, etc.).

Soft insurance market

A soft insurance market is the opposite of a hard one. When the market is soft many insurers are competing for business and premiums are generally low. Insurers relax their underwriting standards and coverage is widely available. Underwriters are generally flexible and willing to negotiate coverage terms. Broad coverage is available with some extensions available for free.

In soft market conditions, insurance organizations often try to expand their market share. They enter growth mode, targeting prospects with cheap rates, attractive policy terms, and, when allowed, discounted coverage. In the most extreme cases (seen more so in less regulated markets around the world), the soft market resembles a bidding war, with everyone chiming in last minute to offer the cheapest deal on a risk. With all this buzz, insureds and their supporting brokers are encouraged to shop around, and as more companies move their business to insurance carriers with lower rates, the profits for the entire industry start to reduce. On top of that, when focusing on growth and price-driven risk transfer, insurers sometimes let slip on stringent underwriting, meaning loss ratios also start to rise. At some point, a correction to this unsustainable situation (reduced profits and rising loss ratios) is necessary and the market starts to harden.

Factors contributing to a soft market may include:

• Active, growing economy.
• Positive interest rate environment.
• Low/favorable claims activity.
• Abundant capital to insure.
• Strong policy holder surplus.

Examples of current soft markets include:

• Workers’ compensation
• Cyber