Your guide to the hard market

You may have heard that the insurance industry is entering a hard market period, but what does that actually mean? Insurance is cyclical. Just like how the seasons change, the market fluctuates, with each insurance ‘season’ lasting anywhere between two to 10 years.

On top of that, there are two types of insurance cycle conditions – hard and soft – that can affect the status quo. 

What is the difference between a hard and a soft market? 

In a soft market, you are likely to see:                                                            

  • Low premiums
  • Broad appetite and availability of cover
  • Increased capacity, meaning insurers write a high volume of policies
  • Higher limits on policies.

In a hard market, you are likely to see:                

  • High premiums
  • Reduced appetite due to stricter underwriting criteria
  • Decreased capacity, meaning insurers write less policies
  • Lower limits on policies.

Why are insurance premiums rising?
We mentioned above that in a hard market you typically see higher insurance premiums. Why? During a hard market, insurers place more stringent limits on the cover they can write, which automatically lowers their appetite. This in turn means they are writing less policies.

As the insurers’ capacity is lower, it can be more in difficult to find insurance solutions and that leads to an increase in demand for cover, all of which drives the premium prices up.

Why is the market hardening?
There are many reasons why we’re heading towards a hardening market, from natural disasters to rising rates. We’ve listed just a few of them below.

House prices were low at the start of 2020, meaning insurers were losing money on property cover. Then, storms Ciara and Dennis hit in February, which caused a rise in claims when insurers were already suffering a loss on property premiums. 

As we’re still part of the EU, the Solvency II law continues to apply. This regulatory regime was introduced in 2016 to harmonise EU insurance regulation. Principally, it aims to make sure policyholders across the EU have the same level of protection, regardless of where they purchase their insurance. However, it has resulted in some insurers leaving the market, meanwhile others have reduced their capacity considerably.

Another factor is the Ogden Discount Rate has changed; this is a calculation used to work out how much compensation insurers should award someone who has life-changing injuries to cover them for loss of earnings and any care costs. The rate changed from 2.5% to -0.75% in 2017 and then from -0.75% in 2017 to -0.25% in July 2019 in England and Wales, which has resulted in insurers paying out more on big personal injury claims.

What is the effect of COVID-19?
Even before the Coronavirus pandemic hit, the tides were changing. COVID-19 has naturally had an effect on the market, compounding everything.

John Neal, CEO of Lloyd’s of London, told the Financial Times back in April that the pandemic is “no doubt the largest insurance challenge the industry has ever faced”. In May, Lloyd’s forecast that COVID-19 will cost the insurance industry $203billion (£166billon) worldwide.  Meanwhile, the Association of British Insurers (ABI) envisages the UK insurance industry will have to fork out more than £275million to travellers who had to cancel their trips as a result of the pandemic.  

It is, therefore, likely that COVID-19 will extend the length of the hard market, as the insurance industry tries to recover from the impact of the crisis.

What does this mean for me and my businesses?
During a hard market cycle, it can be more difficult for businesses to find cover, and it’s our role as your broker to guide you through the insurance landscape. We have longstanding relationships with several insurers, which allows us to have conversations with the right people for your business needs. We act as your champion out there in the marketplace, whether it is in a hard or soft cycle, to get you the best cover for your business.

We always keep a close eye on any market fluctuations. We will get in touch with you ahead of your renewal date to discuss your personal circumstances and how any changes in the insurance cycle will affect you.