What it means to be in a “Hard Market”

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The insurance market has a complex set of conditions that impact how risks are priced. Keep in mind that insurance is simply the pooling of similar risks, spread around many times, so that the “law of large numbers” can ensure that more money is collected than claims that pay out. Using this strategy, you can pay a relatively small sum of money to protect yourself against larger financial risks. It’s simply a trade-off, a bet, if you will. This principal holds true for every kind of insurance you can imagine.

 

How does this work, on a practical level?

Insurance companies bring together investor funds to wage this “bet” and they hire actuaries to predict the amount of losses and determine how much premium needs to be collected from each risk pool in order to maintain a small underwriting profit. The insurers will manage their internal risk further by purchasing Re-insurance. The helps them take on large amounts of risks beyond their normal appetite and eliminate the risk of getting wiped out by a bad series of events within that risk pool.

 

How do insurance companies make money?

They make money in two ways:

Underwriting profit. As described above, if they price the risks correctly, they will pay out less in claims and administrative overhead than they collect in premiums.
Investment profit. This is actually a very large source of profit for insurers. The funds they collect are used to build up “reserves” for paying claims, but rather than leaving that money in cash, they prudently invest it in bonds, debt, real estate and other safe havens that yield decent ROI.

 

Why did my rates increase?

Your premiums can increase even if you do not personally have any claims. The simplest and most common reason this happens is when the insurer underprices a given risk pool and then has to increase rates to get back to underwriting profit.

 

Soft vs Hard Markets

When too many insurers in a given risk pool start a “race to the bottom” with their pricing, this is called a “soft market” and is beneficial to the consumer while it lasts. The unfortunate reality is that soft markets don’t ever last. Much like the stock market, insurance money is driven by fear and greed. Once their collective pricing gets too low to sustain profits, the fear kicks in and they all start increasing their rates to make it up. Coverage terms tighten up and prices rise. This is called a “hard market”.

 

The market is getting hard now

We have been in a soft market for the past 10 years across almost every type of insurance (other than health insurance). Currently, the property and casualty market is getting hard again. This is especially the case in commercial property and with business and personal auto insurance.

 

In our agency, we are seeing rates increase anywhere from 10-50% on commercial property, particularly along the gulf coast. If your property is older, frame construction and close to the water, it’s even harder to find decent coverage at an affordable rate. These effects are trickling over into homeowners insurance as well. Our clients, in many cases, have called other agents for quotes and cannot get anything.

Rest assured that we are going to shop your coverage with our best markets and always strive to find you the best coverage at an affordable price. It’s important that you budget for increases in your insurance costs this year and manage expectations, because their simply are not a lot of options in many cases.

If you are concerned, please call me and let have a review of your policies and strategize. We want to be pro-active and get out ahead of these challenges.

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