You may not have heard the term ‘Hard Market’ before, but it’s something you may well be hearing over the coming months from your insurance broker. What is it and how could it affect your business?
An insurance contract is built on a promise between the customer and the insurer. The customer promises to pay the premium and, in turn, the insurer promises to pay claims within the defined terms of the policy. As a rule, the majority of clients go through a policy year without having to make a claim and, when the insurer has enough clients like this – and can avoid any catastrophic losses – it is able to make a profit.
When insurance companies are making a profit, they are an attractive proposition for investment and can attract additional capital. This enables the insurers to sell more insurance policies and therefore to grow, generating more profit for their investors.
In this scenario, when lots of insurers are looking to grow, they compete for market share which drives down insurance costs for individuals and businesses.
The flip side, however, is that when prices fall too low the industry as a whole starts to make losses, paying out more in claims than it is collecting in premiums. At this point, the investors start to reduce their capital invested, meaning that insurers have to reduce the number of policies they write.
This lack of insurance capacity then starts to drive premiums up sharply for all customers and can lead to a shortage in some types of insurance, meaning that businesses can see huge percentage increases or possibly become uninsurable.
This is known as a ‘Hard Market’. Typically, what happens in a hard market is premiums increase significantly in a short period of time before the tide turns again and insurers return to profit. Then follows a longer, more sustained period of smaller premium reductions before the cycle starts all over again.
This cycle is similar to the ‘boom and bust’ of a recession and the timing of it can be difficult to predict. That said, we are now seeing the signs of premiums for businesses across a variety of sectors starting to harden and becoming very difficult in certain specialist areas.
It is therefore quite likely that most businesses will have seen an increase in their insurance premiums over the last year, which is obviously not ideal on the back of a global pandemic.
The best way to mitigate against these increases is by dealing with your renewal early to not get caught out unawares. Additionally, it is key to demonstrate why you present a good risk to insurers, through good risk management.
Sam Leeder ACII
Actus Insurance
samleeder@
actusinsurance.co.uk
0114 2903624
07718 189476
