By: Tosha Revell, Benefits Consulting Account Manager
Economists study consumer behaviors, but it is up to sociologists and psychologists to help explain why we buy what we do. When deciding what to buy at any given time, you will most likely consider your ability and willingness to buy a product. The utility, or total satisfaction of a product, will help you make your decision.
All industries go through cycles of ups and downs, and the insurance industry is no different. There are two defining cycles in which the insurance industry can determine what rates to impose and how much capacity is available at a given time for insurance in the market place. These two cycles are the hard market and soft market.
Characteristics of a soft market:
- Lower premiums
- Broader coverage
- Available and reduced underwriting
- Easier to obtain insurance
- More competition among carriers
Characteristics of a hard market:
- Higher premiums
- More underwriting
- Harder to obtain insurance
- Less competition among carriers
So are we in a hard or soft market? There is some controversy surrounding this subject. Some would say that we are in a hard market or fast approaching one currently. However the evidence still does not prove that is actually true. According to economist there are four things that must happen before we reach the hard market.
- The insurance industry would have gone through a period of large underwriting.
- We must see a decline in capacity, or the ability to provide insurance.
- The cost of reinsurance would rise considerably, subsequently creating a shortage of reinsurance capital. This will take large catastrophic losses to reach. Although we are seeing some of these types of losses, we have not reached the level of hard market.
- We would see more pressure and restriction with underwriting and pricing.
Contrary to what some may believe, there is no concrete evidence that places us in a “hard market” today. We are, however, in an unstable economic market; this means agents and consultants must act accordingly and explain in detail the situations of their clients. Businesses should be looking to appropriately manage their risk at higher levels than they have done in past years.
One of the major components of managing risk starts first with identifying the risks you have. Once you have thoroughly assessed what your risks are, speaking with a insurance professional who can help implement the most effective way to reduce your loss frequency is key. This makes your risk less surprising and more predictable. It is also a good idea to see how each risk differs from each other, this way you can determine the best possible solution on how to insure the risk at hand.