The impact on policyholders can also be increasingly adversarial and make budgeting difficult at best. At worst, policyholders may face significant increases in premiums and deductibles, reduced coverage options, or even nonrenewals. Later we'll discuss the importance of communicating with customers early and often in a hard market and identify some risk management strategies that go beyond insurance.

Industry underwriting cycles evolve from competition that results in lower premiums and/or broader coverages during a soft market, especially when investment income offsets adverse underwriting results. Then, as losses mount, the industry enters a hard market where premiums increase and/or coverages are reduced, the latter most often the case when regulators are not amenable to rate increases.

We've seen this in recent years when it comes to adverse claims experience due, for example, to increasing losses attributable to windstorm and hail…the absence of regulatorily sanctioned rate relief results in the introduction of coverage limitations such as ACV roof valuation provisions and cosmetic damage exclusions. This can have the adverse effect of consumers saving a few dollars but incurring a risk of thousands of dollars.

Historical Perspective

Since the 1970s or at least the 1980s, underwriting cycles have become less and less predictable, with soft markets often lasting many years when investment income provides a significant counter to underwriting (un)profitablility. This can lull industry practitioners and policyholders into a false sense of stability when it comes to premium affordability and coverage availability. While the exact timing of these markets is debatable, the following is a brief discussion of the approximate time periods and causes of these hard markets. Having started in the industry part-time in 1969 and full-time in 1973, the first hard market I experienced was about 1975 – 1978 and was attributed by most experts largely to inflationary pressures, especially in the cost of building materials and labor and medical care. Probably the worst hard market in my career took place around 1984 – 1988 and was characterized by what was perceived to be a "tort" crisis, particularly involving medical malpractice and long-tail pollution liability claims for occurrences that began as far back as the 1940's. This caused some carrier organizations to consider replacing occurrence-based liability policies exclusively with claims-made forms. Fortunately, due largely to agent opposition, that never happened on a large scale and the tort crisis alarm gradually passed and the industry returned to some coverage normalcy.

During this period, some carriers were allegedly expending 25% of premiums on legal expenses, sometimes more for certain lines of insurance like medical malpractice. Reinsurance market capacity declined dramatically. In addition, the 1980's hard market was considered by many to be a product of overreliance on cash flow underwriting due to investment income offsets for underwriting losses. This practice took a huge hit in 1987 when the Dow Jones dropped 22% in one day on "Black Monday." All of these factors led to an alarming increase in the number of insurer insolvencies.

Though possibly not as broad and deep as other hard markets, the industry experienced tightened markets from 1992 – 1997 or so following Hurricane Andrew in 1992 and the Northridge earthquake in 1994.

The next notable hard market took place in approximately 2001 – 2006 following the 9/11 terrorist attacks and Hurricanes Katrina, Wilma and Rita, not to mention Hurricanes Ivan, Jeanie, Francis, and Charley in 2004. These events significantly impacted underwriting results and, along with the bursting of the Dotcom bubble that again shook up investment markets, resulted in high combined ratios for many insurers.

The current hard market arguably began in 2019 and was exacerbated by the COVID 19 pandemic, supply chain issues, low investment income, rising inflation that began in 2021, and a number of notable catastrophes in the form of hurricanes and associated flooding, tornados, hail storms, wildfires, freeze related losses, and, internationally, floods and earthquakes. From 2015 to 2022, there were eight straight years of catastrophes that caused $10 Billion or more each. During the period 2020 to 2022, natural disasters caused an estimated $275 Billion, the greatest three-year total on record. According to A.M. Best, industry policyholder surplus declined by over 9% in 2022. This, combined with reinsurance price increases of about 15% in 2022 and 30% so far in 2023, has severely limited underwriting capacity and caused retail prices to rise. When coupled with recent poor loss experience, coverage availability decreased considerably.

Hard Market Evidence

Statistical numbers are one thing, but what empirical, if anecdotal, evidence exists to support the contention that we are currently in a hard market and a serious one?

Auto Insurance. We've now experienced at least two years of 100+ combined ratios with some carriers experiencing combined ratios of 110-120%. Investment income can't offset these numbers. One major carrier is currently seeking a 12% rate increase in some markets in addition to a 7-8% increase earlier this year. Uninsured motorist costs have escalated with estimates that 15-17% of drivers countrywide are uninsured, with that number approaching 30% in some states and even higher in specific locales.

Homeowners Insurance. Carriers have been hit hard by windstorms and wildfires. Some condo owners are finding it difficult to get insurance at any price in these areas. According to a CBS News story, Louisville, CO condo owners were hit with 700% premium increases due to wildfires, flooding and hail. Budgetary considerations go out the window when the issue becomes affordability or availability.

Commercial Lines. Anecdotal evidence points to staggering affordability issues in the habitational marketplace. According to Verisk, for this market segment, 2022 industry underwriting losses were six times that of the prior year. Several East Coast agents, posting on LinkedIn, opined that renewal premium increases of 35-300% are not uncommon…if you could even get a renewal offer.

According to Colorado consultant John Putnam, CPCU, of Putnam Assurance and Risk Services, one particular co-op experienced a 400% premium increase on top of higher deductibles and the account had to be split between two E&S carriers. Another account, the insurance program of a condominium complex with a fire loss was nonrenewed and a new program had to be split among five insurers, increasing the premium from $60,000 to $425,000. These Colorado risks indicate how that particular market (and, increasingly, others) is impacted by natural catastrophes such as hail storms and wildfires followed by flooding.

A number of agents are reporting the need to move business from admitted markets to E&S carriers with much more restrictive coverages and larger premiums and deductibles and the need to move from "A"-rated to "B"-rated carriers. According to many carriers, reinsurance capacity has significantly decreased with available program costs the highest in decades. In an article written by agent Karen O'Connor Corrigan, CIC, CIRMS, of O'Connor Insurance, she reported that the Community Associations Institute survey of property owners and insurance professionals found that 96% were experiencing major premium increases, 83% were experiencing significant nonrenewals, and over half of respondents reported premium increases of 11-25% and over a third had 26-50% premium increases.

Even perhaps more perilous than premium and deductible increases are coverage reductions. In her article, she cites common coverage limitations that include no blanket coverage options, ACV on roofs over 10 years old, a one-year limitation to report wind or hail damage, no sewer or drain backup coverage, water damage exclusions, no building ordinance or law coverage, no included earthquake coverage, and HIGH deductibles.

The evidence is quite clear that we are currently in a hard market that perhaps we have not seen since the 1980's. So, what problems does the current hard market present, especially to agents, and, on a somewhat brighter note, what opportunities may exist?

Problems and Opportunities

A hard market presents both problems and opportunities. Astute agents and others can attempt to mitigate the problems and capitalize on the opportunities. Problems include retaining customers, avoiding E&O claims, and addressing illegal or unethical behavior. Opportunities include acquiring new business and generating higher revenue and commissions that can be invested in enhanced services and strategies for dealing with future hard markets. The hard market impact on policyholders is that budgeting accuracy becomes increasingly unpredictable and, worse, insurance becomes more unaffordable and, worst, unavailable. But there are some things insurance professionals can do to address these issues, including risk management approaches beyond insurance, along with risk financing recommendations. The remainder of this article focuses on approaches to deal with these realities. As former TV personality and author Art Linkletter said, "Things turn out best for the people who make the best of the way things turn out."

Retaining Existing Customers

Prosperous agencies know that the key to profitability is customer retention. Adding new business is almost always done initially at a net loss. It's the retention of business over a period of time, often at least 3-7 years, that is necessary to ensure profitability.

Step 1 is to start the renewal process earlier. You will need additional time to "sell" the underwriter or, if necessary, remarket the account. Astute agents know that, in the case of commercial accounts with experience-rated workers compensation, you can't wait until 30, even 90, days before policy expiration to initiate the renewal process because statistical cut-off dates for reporting claims and reserves. This part of the process must begin at least 6 months, perhaps 8 months, in advance of the renewal date. To some extent, the same is true of all lines of insurance impacted during a hard market.

If you know that premium and/or deductible increases or coverage restrictions are likely coming, you need to communicate this to your customers as early as possible in their budgetary process. The reticence to do this often centers on the belief that this gives them more notice and opportunity to shop their account. That's true, but it also gives the insurance professional the opportunity to explore alternatives and rebut competitive offers. I've always encouraged agents to pursue coverage education and professional designations beginning with CIC and then CPCU. I believe it's increasingly important to expand one's insurance knowledge to other risk management and risk financing approaches, especially when dealing with a hard market.

In selling an account to underwriters during a hard market, the agent must let the carrier know the insured's commitment to embracing loss control recommendations and practicing other risk management techniques, from avoidance to segregation of exposures. This knowledge can be attained through the pursuit of programs like the National Alliance's CRM designation, The Institutes' ARM designation, and programs of other organizations such as PRMIA.

Risk financing is critical whenever significant deductible or other risk sharing programs are necessary as a condition of policy issuance or as a matter of affordability. When the market moves from hard to soft and customers experience premium reductions, at least some of those savings should be moved into risk financing programs and other risk management approaches that make if far more likely that a policyholder can more effectively deal with the next hard market.

Be aware, for each underwriter, what they are looking for in submissions and feature anything the policyholder has done or plans to do that may mitigate losses. If the account has carrier loss control recommendations, make sure the insured is in compliance. This is true whether you are trying to retain the current carrier or remarketing the account to another insurer.

Be prepared to respond to "high price" objections…the next section of this article includes tips that work on both new and renewal accounts. Explain why certain coverages and/or limits must be provided. Give the insured, where appropriate, options for temporarily suspending nonessential or potentially self-funded coverages with due diligence given to caveats and disclaimers when doing so. Once again, where possible and appropriate, replace or supplement insurance options with alternative risk management techniques and make sure the underwriter understands and appreciates the insured's willingness to consider and focus on loss control.

Getting New Customers

While retention is the key to profitability, new business and cross selling are the keys to growth and stability. The upside to a hard market is that there is probably no better time or greater opportunity to land new business than when customers are unhappy in their current relationship. Even historically loyal customers may move more towards the "price shopper" spectrum when premiums escalate unexpectedly and budgets are at stake. Under hard market conditions, more prospects are looking around than during a soft market. In addition, increased premiums mean increased commissions and this increased income can be used to improve and expand customer services in a way that differentiates you from the competition now and in the future. So, let's take a look at twelve tips you can use to improve your sales performance during a hard market…or any market conditions for that matter.

One other thing to keep in mind, particularly if you further your learning by attending a sales training program, is to remember that you're often selling to a sales person. In many cases, they've seen all the canned sales tactics. Honesty and sincerity are your best sales tools with folks like this, really.

In closing (no pun intended), view a hard market not as an impediment to sales success, but as an opportunity to acquire accounts from people who have not read this.

E&O Issues

When E&S markets are your only alternative for coverage, be sure the insured completely understands the risks involved, especially when there are coverage reductions. Exercise due diligence when reviewing E&S policy deliverables and be wary of significant coverage deficiencies.

Always make a diligent market search in accordance with regulations and never use a nonadmitted carrier not on the regulator's "approved" list. Fully explain to the customer when using nonadmitted carriers any deficiencies in regulatory oversight and the lack of guaranty fund protection.

Also explain to the customer the pitfalls of using B-rated carriers, residual markets, captives, RRGs, etc. if such markets are a last resort. For these and E&S markets, consider using disclaimers and hold-harmless agreements. Employ the advice you've received at E&O seminars and webinars.

Don't forget the E&O "Trinity": (1) Communication, (2) Documentation, and (3) Consistency.

Hard Market Shenanigans

Hard markets are all too often rife with fraud or unethical conduct by both customers and industry practitioners. Be on the lookout for these types of activities and address them with prospects and customers and, as warranted, insurers and regulators.