How the State of the Insurance Market Affects Cost and Availability

Insurance markets are cyclical in nature. The cycle runs through what is known as a soft market and a hard market. During a soft market, insurance premiums tend to be lower and insurance companies have a higher appetite for taking on risks. A hard market is the opposite in that not only are premiums higher, but the appetite to take on risk is decreased.

Although premium rates are important, when the market changes, insurers also evaluate what kinds of risks to take. During a soft market, underwriting criteria is relaxed, and you will see insurers take on risks they may not have taken in the past. As the market hardens, underwriting criteria becomes more stringent and you will see insurers less willing to take on certain types of risks.

A part of this relates to the capacity of insurers to write risks. Insurance regulators have a goal of making sure insurance companies have the financial ability to indemnify. In addition, the most important criteria for an AM Best rating is the ability to pay claims.

When capacity is reduced, insurers need to make decisions regarding the circumstances under which they will assume risks of loss. This can mean underwriting criteria becomes more restrictive, and can also mean insurers exit lines of business and no longer write insurance for certain industries.

Increased capacity means insurers have the ability to expand both the lines of business they cover and exhibit a willingness to write in industries they have not previously written.

What to expect from insurance carriers during a hard market?

During a hard market, two things happen. First, the premiums for coverage increase. Second underwriting gets tougher and more stringent. What was once an acceptable risk during a soft market may either be acceptable under revised terms and conditions or not acceptable at all to an underwriter. An insured should expect reduced coverage availability, reduced competition as insurers reduce their presence in or exit the line entirely and higher premiums. They should also expect a closer examination of their practice and their claims history as underwriting criteria become more stringent.

What can you do to prepare for a market hardening?

The first thing you need to do in order to prepare for a market hardening is to take a look at your current risk management program with your insurance agent and risk management professionals to determine which components are necessities, which ones can be eliminated and which ones you are willing to take on a larger share of the risk of loss. Additionally, you need to take a look at what you are doing proactively to reduce or eliminate losses.

You also should not wait until the last possible moment to work on your renewal – especially if you have a history of claims. Completing and submitting your renewal application on a timely basis will allow you time to evaluate your options and, if necessary, alter your risk management strategy to reflect the reality of the insurance market at the time of renewal.

A risk management professional with experience working with lawyers professional liability policies is essential to guide you through the market hardening should it occur.

Since the 1950s Daniels-Head has been one of the leading professional liability administrators in the United States. Let us put our experience in this area to work for you.

More Resources:

Professional Liability Purchasing Checklist

Key Questions To Ask When Shopping For Professional Liability Insurance