The Do’s and Don’ts of the Hard Market
(Available in English only)
Just like other types of financial markets in the world, the insurance market is constantly changing based on supply and demand forces. Sometimes, as a market sector begins to experience losses, it can “harden”, making it more difficult and expensive to purchase certain types of insurance policies. Keep reading to learn more about the hard insurance market and the dos and don’ts of this challenging time.
When the insurance market hardens, it’s important that your company takes the time to evaluate risk and consider making changes in order optimize risk management. Combine this with a few other helpful strategies, like self-insurance, and you’ll find that surviving a hard market isn’t as difficult as it may seem.
What is a Hard Insurance Market?
A hard insurance market is a market in when insurance companies limit capacity (capital available) for the types of insurance policies that they issue. This results in an increase in premiums, or coverages being restricted in order for insurance companies to stay profitable.
During a hard market, companies will also change their underwriting procedures, generally making them less favorable to buyers, which leads to businesses needing to re-think their insurance policy strategies and coverages. Often a business will go to renew a policy during a hard market and they will find that their coverage is much more expensive, or perhaps even no longer available.
What Causes a Hard Market?
The insurance market goes through cycles. Typically, when a type of insurance is new (such as cyber insurance in the early 2000’s) the market will start out as a “soft” market, as insurers are trying to encourage everyone to buy, and loss experience is not developed. This leads to the insurance companies offering low premiums as they compete for potential customers.
Once more people begin to buy this new insurance, a market can begin to harden for different reasons, such as there being too many losses claimed in that specific market, natural disasters, or regulatory changes that cost the insurance companies more money than originally planned.
Continuing with the above example, during the COVID-19 pandemic, the cyber insurance market began to harden as more and more ransomware attacks generated claims, causing insurance companies to take on losses. Compounding the issues is the level of damage these attacks would cause was much greater than anticipated when the policies were issued.
As a result, companies offering this type of policy raised their premiums in order to cover their losses. Along with raising the prices of premiums, many companies changed their underwriting to cover less in the cyber world than they did previously or entirely withdrew from the market, making these policies expensive and difficult to obtain.
What You Should Do During a Hard Insurance Market
When a company finds themselves in a hard insurance market, there are several things they should do to ensure the best outcome for their business.
1. Evaluate Risk Management
As a company finds their insurance premiums rising, they may find there are coverages they can no longer afford. This is when it is time to evaluate risk management to ensure the company remains satisfied in their coverage against the highest potential risks while shedding unnecessary coverage.
It can be beneficial for a company to speak to a risk management specialist as they go through this process as they can give a an expert opinion on which coverages they may be able to do without. Sometimes a policy that provides the basic coverages, without all the fancy additions can be all that is needed to weather a difficult insurance market.
It may also help a company to evaluate the probabilities of certain types of claims to know what could happen if a particular claim is made. If the results of claims are within the companies means to manage themselves, it may be better to skip those particular coverages for the time being.
A company should make a list of all the coverages required from most important to least important to provide a better visual of what they can do without. They may also consider lowering policy limits on the policies which are less important in favor of keeping the more important policies at their current level of coverage.
2. Cultivate a Relationship with an Insurer
Cultivating a relationship with a particular insurer is critical during a hard insurance market as they can provide valuable insight into your policies. Even if the coverage they are offering may be changing, depending on your policy, they may be able to recommend alternatives.
If your company has been involved with a specific insurer for a decent amount of time, they may be willing to temper the changes during the hard market to make the premium increase not seem as drastic.
Additionally, if you have struck a deal on a specific policy for an extended period of time, there is a chance the company will honor your contract even during a hard market, which is why it can be helpful to make a good business relationship with an insurer. If you need help finding an insurance partner to meet your business needs, Axxima can help direct you in the right direction to find the insurance partner that will be with your company through hard and soft markets.
3. Consider Self-Insurance
No matter what type of relationship a company has with their insurer, there may come a time during a hard market when coverage for a specific area of operations simply isn’t available. Usually this happens when a policy lapses during a hard market and the insurer is unwilling to renew.
When this market dislocation happens, it’s time to take a look at that aspect of operations for which the policy lapsed and consider self-insurance. Self-insurance is where a company sets aside an amount of money in order to prepare for claims that might arise in the future. While self-insurance isn’t necessarily superior to insurance coverage in risk-management terms, it can be monumental in protecting a company during a hard insurance market when they don’t have another option.
You cannot take a leap into self-insurance blindly however, and you will need an actuarial consultant to help you know if it is even feasible for your business to begin with. Then they will help you to devise a plan of how much set aside. Just because it is called self-insurance doesn’t mean you need to pursue it on your own.
Oftentimes during a hard insurance market, other companies are in the same boat and are willing to group together to share the costs and risks associated with self-insurance. It can be helpful to ask around and see if any other companies are lacking coverage they were once able to find with ease.
Think self-insurance may be the right choice for your business? Call Axxima today to set up a consultation with one of their consultants.
What Not to do During a Hard Insurance Market
Now that you know what you should be doing during a hard insurance market, it’s time to take a look at the things you shouldn’t be doing when you find it difficult to obtain an insurance policy.
1. Be Cautious about Switching Insurance Providers
During a hard market, as you watch your premiums go up, it can be easy to be dazzled by new insurance companies that have recently entered the marketplace. You may think about switching over to a new carrier because they offer a lower premium or deductible for a policy with your desired coverage.
The reality is, many withdraw from certain sectors during a hard market, especially if the market is hardening due to a substantial amount of claims in that sector. These companies are often ones that recently entered the market place.
Therefore, it may be best to stick with your tried and true insurance partner that has a track record of success, because when the new company withdraws from that market you will need to find coverage elsewhere, and having the old one to take you back may be more costly (particularly if you experience losses) than sticking with your old one from the start.
2. Be Cautious in Accepting a Higher Deductible in Exchange for a Lower Premium
It is common during a hard market for a company to notice their premiums increasing and call their insurance company to see what can be done about it. Most of the time, an insurer will not lower the premiums unless they raise the deductible, which is what they will offer the desperate company.
Often however, these higher deductibles are not worth it. As difficult as it may seem to come up with a higher premium each month, this is often better in the long run than an increased deductible. The best way to evaluate whether an increased deductible in return for lower premiums is really a good deal is to discuss both options with an expert.
The same goes for considering lowering the limits on your policies in order to lower the monthly premium. You should carefully evaluate the potential risks of doing so and what it may cost your company before proceeding.
Need help to calculate the risks of swapping a reduced premium for a higher deductible or lowering policy limits? Axxima can help you to build a risk management plan and evaluate the differences in costs against your expected claims for a period of time.
3. Be Cautious about Going Uninsured
A hard insurance market can make some companies feel it would be cheaper to be uninsured and just handle the claims themselves as they come along. This is almost never the case.
The last thing you want to do during a hard market is cancel your necessary insurance coverages without at least a self-insurance backup plan. Remember, with the right guidance your premiums can be reduced with some of the additional features removed, but you should always strive to maintain the basic insurance required to deploy your risk management plan.
Final Tip to Surviving a Hard Insurance Market
Although it can be disheartening to find the insurance market hardening, just remember that insurance policies are all about balancing risk management with the associated costs, and that you are never without options.
Whether you decide to approach your insurance company for a different policy, switch carriers, or even switch to self-insurance, you shouldn’t do any of these without the proper guidance.
Axxima is here to help, and they offer a wide variety of services that can help in any situation. They can help you evaluate the possible risks your company may face, as well as act as an actuarial consultant in the case of venturing off into self-insurance. So give Axxima a call and let them help you with all your insurance needs today!