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What is a Hard Market?

Charity Delich
Charity Delich

A hard market is a phase of the property and casualty insurance cycle that is characterized by high demand and low supply. When the growth in demand for insurance increases more rapidly than the available supply of insurance, the outcome is a hard insurance market. In this type of market, insurance is generally more difficult for buyers to obtain. Buyers are also more likely to experience high insurance premiums and steady rate increases. Given the market dynamics, a hard market is usually considered a seller’s market.

Insurance companies typically profit during a hard market period. They can command higher insurance premiums from potential buyers because insurance coverage is in demand. Insurance companies are also able to underwrite more restrictive terms and conditions into their insurance policies. During a hard market, buyers lose some of their negotiating power. Based on these factors, insurance companies generally experience few underwriting losses during a hard insurance market phase.

Man climbing a rope
Man climbing a rope

A soft market is the opposite of a hard market and is often referred to as a buyer’s market. In a soft market, insurance is usually easier for buyers to obtain. Rates are typically lower because competition among insurance companies increases. In addition, insurance companies tend to adopt more lenient underwriting standards in order to secure prospective buyers and to retain existing clients. As a result, soft markets can mean significant underwriting losses for insurance companies.

The property and casualty insurance market is cyclical, and it rotates between soft markets and hard markets. While recurrent periods of hard and soft market conditions exist, the overall cycle is irregular and can be unpredictable. The cycle can be impacted by the occurrence of a major insurable event, such as a hurricane, tsunami or other natural disaster.

Although often favorable towards sellers, hard markets can present some challenges for insurance companies. Client retention can be a key concern. When insurance premiums rise, buyers are more likely to start shopping around for a new insurance provider. This can prove challenging for insurance companies who are trying to retain their current book of business. Insurance companies may spend the bulk of their marketing resources and time retaining their existing clients, leaving them with less means to spend on attracting new clients.

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