Updated: Feb 15
The insurance marketplace is unpredictable and can experience cycles of soft and hard markets. Do you have the right approach for your risk management?
Preparing for an Insurance Hard Market
With the insurance marketplace, availability, terms, and pricing of commercial insurance are subject to cyclical fluctuations, and as we know, in a soft market, we enjoy stable or decreasing premiums, broader coverage terms, and more competition among carriers. Unfortunately, it is time to brace and prepare for the rare and unpredictable hard market, often caused by a combination of catastrophic losses, inconsistent underwriting profits, mixed investment returns, economic factors, inflation, and reinsurance costs. Subsequent effects are rising insurance premiums and shrinking coverage capacity, making it difficult to afford adequate protection.
Troublesome Trends in 2023
To further exacerbate the difficulties of navigating a hard market, businesses should prepare for potential labor shortages, supply chain disruptions, and inflation issues. Labor shortages have affected productivity and safety in many industries, and businesses have had to adjust their hiring and retention strategies to address the issue.
Supply chain disruptions continue to impact manufacturing, construction, and retail, creating a need for new technologies, contingency plans, prioritization of US-based supply chains, and eco-friendly options to mitigate potential disruptions. Economic experts predict a potential recession in the next six to nine months, making it pertinent to have established financial plans, scaled-back operations, managed debt, and secured financial protection.
Furthermore, social inflation and extreme weather events could also drive up costs and cause significant losses for businesses, resulting in the need to adopt innovative solutions to keep up with climate-related losses. And along with that, geopolitical friction, such as the Russia-Ukraine conflict, can cause disruptions in international trade, leading to surging fuel and energy costs and worsening already challenging supply chain issues.
We’ve Got You
To prepare and position for a hard market, you should not only appreciate falling insurance costs, but also take action to address exposures and expand coverages. Being proactive presents an opportunity to position your business for the best situation down the road:
1. Increase Coverage While You Can
A hard market is characterized by a decrease in risk appetite by insurance carriers, while during a soft market, insurers are competing for your business.
As the market turns, you'll be competing for coverage, so it's best to get out ahead of the hard market to increase your excess coverage while prices are low.
By doing so, you can improve your negotiating leverage down the road and be better off.
This means you can likely retain existing coverage in a climate of sharply rising prices or give up some coverage in exchange for a price decrease.
2. Explore the Possibility of Program Restructuring
In some cases, underwriters are willing to write multi-year policies.
Many risk managers have used this tactic to secure terms and coverage while avoiding costly price increases.
3. Invest Savings in Loss Control Measures, Safety Management, and Capital Improvements
The decreasing cost of insurance premiums provides a unique opportunity to invest in savings.
These investments will help achieve additional savings in the long run and will be more attractive to underwriters with strict coverage requirements.
Be Ready for the Changes
It is paramount to be prepared for the changes that come with a hard market. An integrated approach involving both insurance purchasing and risk management will allow for this. Structure insurance programs for maximum benefit, as some lines of coverage may become too expensive.
For example, if supply chain insurance is no longer affordable, increasing an alternative line of coverage to accommodate your overall risk appetite may be a good idea to compensate for the risk of a supply chain interruption. And lastly, remember what's important: while price is a factor, so is evaluating the whole insurance experience, including level of service and support. Proactively address risk and manage exposures to prepare for a hardening market.