How is the Hard Market Changing Commercial Underwriting?

The insurance industry is cyclical, going through periods of either soft or hard markets throughout its history. In the property and casualty sector, soft and hard markets influence many aspects of a contract, including the availability of coverage and capacity, prices, and terms and conditions. For example, carriers want to grow their market share in a soft market, such as the one experienced several years before 2019. Therefore, it typically produces low rates, appealing policy terms, and discounted coverage to attract potential customers. Conversely, challenging markets occur when economic uncertainty, financial market instability, global catastrophes, etc.

Some anticipated that with the robust and growing balance sheets produced, ample capacity, stable pricing, and terms and conditions offering broader coverage, a soft market was here to stay. But by the first quarter of 2019, it was clear that this outlook would not be the case, and by early 2020, the hardening market took a turn for the worse. Intensified geopolitical conflicts, social inflation in North America, unprecedented wildfires, and other natural disasters contribute to the initial hardening of the market, yet many did not foresee it persisting. Then, the onset of COVID-19 furthered “hard” market conditions to the extent that has not been witnessed in decades.

Insurers become more selective with their clients under challenging markets, resulting in increased rates, broader exclusions, and more significant barriers to receiving coverage. They are also less likely to write new business or renew contracts that fail to meet underwriting standards and risk appetite. Thus, regarding the current circumstances, pricing has become less relevant to commercial underwriters, with the focus instead shifting to risk selection.

As the priority for insurance companies shifts to risk mitigation, commercial underwriters are gathering more in-depth information from their clients regarding the business’s risk management procedures. Underwriters are evolving strategies during the demanding market and making critical assessments surrounding how to deploy their capital. Therefore, if a company is uninterested in managing its own risk, insurers will be indifferent to protecting them. Insurers require well-regulated operations and risk-based conscious decisions from the top down within the entire organization..