Every industry experiences cycles and the insurance sector, which operates in hard and soft market cycles, is no exception. In Canada, brokers and insurance companies are currently experiencing the first hard market in over 15 years.
In a hard market, insurance companies apply more stringent underwriting and charge higher premiums. There’s a reduced supply of insurance coverage (capacity) and a subsequent increase in demand.
How we got here
Rising claims costs and the increased frequency of weather-related losses, combined with a low-interest financial environment, have contributed to eroding insurers’ profits and have led to this hard market. Rob Wesseling, President and CEO of the Co-operators Group of Companies explains: “We have a situation where the claims trends have outpaced the expectations of the industry and as a result they’ve outpaced the premium increases that have gone into the system, and all of the loss prevention and underwriting activities that would typically go along with that.”
While in a soft market pricing is a primary competitive factor, Francisco Saldias, Property and Casualty Specialist at Sovereign Insurance, says that “when the hard market hits, pricing becomes less relevant and there’s increased focus on risk selection. It can also lead to rate increases for clients and, in some cases, contracts aren’t being renewed, which is stressful.” The reality is that insurers are more likely not to renew an account if it performs poorly compared to previous years.
Insurers are also less likely to make exceptions to writing a new business account that doesn’t meet its underwriting criteria and risk appetite. The hard market requires insurers to re-align their risk appetite and in some cases remove themselves completely from a class of business.
Brokers who may have an unprofitable book of business with an insurer may even see their contract cancelled, which restricts their market options making some accounts difficult to place.
A time of opportunity
With the challenges that a hard market poses, it isn’t feasible to simply wait it out.
At Sovereign, we choose to see a hard market as an opportunity to focus on elements beyond price and get back to the fundamentals, but also a chance for brokers and insurance companies to demonstrate their value to clients. You can face the challenges of a hard market with an opportunity mindset and come out stronger as a result.
The hard market is an opportunity to:
- Focus on value, not just pricing: Like we mentioned, hard markets can bring with them rate increases and higher premiums. That’s why brokers and insurers who succeed in a hard market are those who don’t just sell pricing to the client—they provide value. Whether the market is hard or soft, clients should be serviced by an insurance company that can design a policy with coverages that fit their complex business needs and that can provide pro-active risk management and efficient claims services. Insurers have an opportunity to communicate, or in some cases re-educate, brokers and clients on the details of their risk appetite, coverage capabilities and services. This in turn can lead to higher quality submissions, more comprehensive coverage and better placed risks.
Another way that brokers can add value to clients is by sharing educational materials, market updates and claims information to keep clients informed.
- Build and maintain strong relationships: In a hard market, brokers and insurers must work harder to maintain strong relationships and support open communication; strong business relationships cannot be taken for granted. Where possible, an insurance company can work with their brokers to research alternative market options. Insurers should provide brokers with an open-door approach when they have questions, so they in turn can better provide their clients with information and find the best placement for their business.
At Sovereign, we choose to see a hard market as an opportunity to focus on elements beyond price and get back to the fundamentals, but also a chance for brokers and insurance companies to demonstrate their value to clients.
Deliver an exceptional experience: Clear communication and timely service are key. Insurance companies need to be proactive in explaining any change in their risk appetite or underwriting criteria, ask the right questions, be able to provide answers to broker questions and be clear as to their intentions on renewal pricing and terms. And if the insurer is unable to write the account, brokers need quick turnarounds so that they have lots of time to re-place business.
- Focus on underwriting excellence: A hard market typically follows a few years of insurance companies experiencing increased claims and shrinking profits. Apart from increasing premiums, during a hard market, insurance companies also take the opportunity to assess their tolerance for risk and will place an increased focus on underwriting fundamentals. While Sovereign Insurance has always had an “underwriting first” strategy, the key is to commit to your tools and be vigilant. It’s important that a risk fit a company’s appetite and that it meets their risk criteria. At times, the client’s current carrier might be the right company for them and their premium and terms may be reasonable. Francisco’s advice is to ask the questions: ‘why am I looking at this piece of business? Is it a real opportunity? Is the risk suitable?’ “Go through your checklist and be sure that all the I’s are dotted and T’s are crossed,” he says. “When you approach the account that way, you have a better chance at success.
- Look at all business with fresh eyes: In a hard market, there’s a renewed focus to adequately apply rate to make the book profitable, which benefits everyone in terms of the opportunity for the market to stabilize. Rather than just looking at what’s been done in the past, insurers will look at all business (renewals and new business submissions) as if its new business coming in the door and underwrite to that standard.
“Insurers don’t want to keep the legacy of remaining on accounts that don’t fit within their current appetite or performance standards, or ones that are underpriced,” says Brenda Powell, Property and Casualty Specialist at Sovereign Insurance. “Sometimes you need to deliver a hard message, but it’s important to be clear with your message to the brokers and provide explanations for the actions taken. This will assist them with recommending products and providing information to the insureds.”
Rising premiums, reduced capacity and stricter underwriting can make the hard market cycle a difficult time for brokers, their clients and insurance companies. But in meeting the challenges and demonstrating value, the marketplace can come out of it stronger and provide clients greater stability.