What is A Hard Market in Business Insurance?

hard market

You may have received your business insurance renewals recently and the premiums are up – maybe even up significantly. You call your agent and ask why, and they answer “Well, it’s due to the hard market – there’s really nothing we can do”

That doesn’t mean a lot to you and it probably even frustrates you. So, now you’re online trying to learn what a hard market is, why it happens, and what you can do about it. In this video and post, I’m going to answer those questions and give you some direction and advice on how to handle this.

I recorded this video in May 2023 and we’ve been experiencing hard market conditions for several months now in different parts of the country the effects are more extreme than in others, so let’s start with explaining what is meant by a hard market.

The pricing in the business insurance marketplace fluctuates from time to time and in the business we call these cycles or fluctuations the movement of pricing from hard to soft and soft to hard.

So, what is a hard market?

A hard market is characterized by a lack of risk-taking capital and a steady or increasing demand for insurance.

Like any economic model when supply goes down and demand remains constant or goes up, the price for that commodity goes up.

The other characteristic of a hard market is that underwriting business risks become more disciplined.

That means that marginal accounts from an underwriting perspective – those that have had claims will see prices for coverage rise more dramatically than the mean and firms with terrible claim history may see little to no availability for coverage.

One thing I’d like to add to that statement is that it’s not always claims history that will drive pricing way up or availability way down – if you’re located in an area prone to claims like coastal property or wildfire risk you are likely very affected and we’re seeing this in Florida, Texas, California, and along the eastern seaboard right now.

What causes a lack of risk-taking capital and what does that really mean?

Risk-taking capital is rooted in reinsurance – which is where insurance companies that write your policies go to buy insurance on their books of business so they can spread their risks off their balance sheets to the global reinsurance marketplace.

Over the last 2 years reinsurance companies have paid out tremendous claims for natural and man-made disasters, large “nuclear” auto accident claims, and big liability claims which is causing them to limit the volume of reinsurance they’ll sell to primary insurance companies and the coverage they will sell is priced way higher than prior years.

This is doing two things.

The first is that primary insurance companies – the brand names you know and do business with are forced to retain more of the risks they underwrite so they need more capital to cover this added risk and price in the trends of claims they see coming down the road – like more wildfire, floods, wind storms, hurricanes, and more.

The second thing that’s happening is that primary insurers are passing their higher costs of reinsurance onto you, the customer.

So this double whammy is resulting in some significant renewal pricing for business insurance.

What can you do about it?

If your renewal has already passed and you experienced a significant increase I’d first suggest speaking to your current insurance agent and see what can be done about it.

A significant increase to me is more than 15%.

If they can’t do anything then I would start to speak to other insurance brokers – this doesn’t mean shopping your account out to multiple brokers as I think that can be a huge mistake.

What I mean is that you should have a conversation with a local broker you know, or someone like me who can give you an honest “read” of your situation and suggest a strategy to move forward with.

It may mean going back out to the market and see what stones were left unturned by your current broker or approaching your coverage from a different perspective.

Again, do this with one broker and do not engage multiple brokers to canvass the marketplace – you can see more about why in this video: Business Insurance – Why Using One Broker Gets The Best Results

If your policies haven’t been renewed yet, then start your renewal process early.

Ideally, your broker should initiate this 3 to 4 months prior to your renewal with a frank discussion of market conditions, your claim history, a coverage review, and then a strategy to get through the renewal as effectively as possible.

If your broker is not being strategic about your renewal during a hard market, then it may be time for a new broker, and I’d welcome a conversation to see if we’re a good fit for your business.

Other things to consider:

Review your claim history over the past 5 years.

Do you know what your claims look like, what’s been paid out on claims, why those claims occurred, and most importantly have you taken steps to mitigate those events from occurring again?

While the cost of insurance is up, I don’t think it’s a good idea to reduce coverage limits as this puts your firm’s longevity and sustainability into question.

Instead, think about increasing deductibles, and taking other steps to decrease risk.

Finally, if you spending over $350,000 a year in premiums and have a good track record for claims think about a captive which is like owning your own insurance company.

If you’d like more info on a captive strategy, let’s connect.

Here’s the bottom line.

When the business insurance market hardens like it is now, the value of a highly skilled broker like The Coyle Group becomes clear.

You need an expert partner with broad access to the insurance marketplace as well as the expertise to create a strategy to get you through this as best as possible.

If you’re not well represented today, then I’d love an opportunity to speak with you.


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