How to Remain Profitable in a Hardening Insurance Market

CMR Risk & Insurance Services Inc. > Blog > Business > How to Remain Profitable in a Hardening Insurance Market
Posted by: CMR November 17, 2022 No Comments

The insurance industry is experiencing a hardening market right now. That means the market cycle is on an upswing, premiums are increasing, and carriers’ capacity for most types of risk is decreasing. While there are various opinions about what a hard market looks like in comparison to a soft market, its underlying causes and repercussions are universally agreed upon.

The characteristics of a hard market include:

  • Carriers experiencing, or expecting to experience, significant losses;
  • Carriers firming up their rates and increasing premiums while narrowing their appetite for certain risks;
  • Stricter underwriting standards; and
  • Limited appointments of new intermediaries, and the overall reduction in existing appointments.

Essentially, a hard market means insurers are worried about how they’ll make money. Let’s dive into why the market might harden, what insurance providers can expect, and how they can continue to drive success for their businesses and their customers.

Why does the market harden?

There are a myriad of reasons the insurance industry might find itself in a hard market, the vast majority of which are entirely outside of our control. Here are just a few of them:

  • Climate change: Consumers are facing new risks due to the increase in catastrophic weather and natural events like hurricanes, wildfires, etc. Flooding from Hurricane Ian is perhaps the most recent devastation we can point to, as stories about folks facing astonishing amounts of loss without having purchased flood insurance abound.
  • Inflation: Insurance carriers, like a lot of businesses, make money from investments. When the economy takes a turn for the worse, the return on these investments slows down, and carriers must make up for the loss in revenue through other means. This leads to rate increases and fewer risks assumed, so carriers can control their finances.
  • Supply chain issues: Repair costs on assets like cars and homes continue to increase due to hiccups in the global supply chain. Therefore, claim amounts are higher, and insurers must pay their customers more than before to cover damages, increasing their costs.
  • Political uncertainty: Insurance is a highly regulated industry, and each state in the U.S. follows its own standards: insurance commissioners can be elected by the popular vote in some states, while appointed by the governor in others. The election season results in a large amount of uncertainty for carriers.
  • Changing trends: Macrotrends like the rise in distracted driving have a significant impact on the insurance industry. Between 2020 to 2021, there was a 10% increase in the fatal accident rate (the largest percentage increase in history), and a 25% increase in private passenger auto losses. As a result, carriers will undoubtedly show more caution when writing auto policies because there’s a greater chance they’ll have to pay for accidents. There will also be the pressure to raise rates in order to offset higher claims costs.

What does a hardening market mean for providers?

In a market defined by risk and uncertainty, carriers are taking a more conservative approach to coverage. Insurers want to keep their loss ratios low. As a result, many restrict the areas they write in and the risks they cover. Some may even refrain from renewing policies with current customers. This inevitably leads to larger numbers of un- or underinsured people.

There’s also an inclination to focus less on growth and more on retaining profitable customers, but in a hardened market, the competition for the ideal customer profile is stiff. Thus, providers need to be creative in their retention efforts to prevent their customers from leaving them and buying from another company. Furthermore, because carriers are being cautious about the risks they take on, it’s harder to get appointments, meaning agencies and brokers can’t expand their books of business as easily.

What can insurance providers do to help their business, and more importantly, their customers?

In a hardening market, it’s more important than ever for insurers to find a path to profitability. This will require a bit of creative thinking. Here are three tips to navigate today’s climate:

  1. Offer choice: You may not be able to serve your customers directly, but give them the ability to still find coverage where they can. You can still add value to your relationships and sell to them in the future.
  2. Offer digital solutions: We’re in the middle of a convenience revolution right now. Customers want easily accessible, digital experiences whether they’re buying car insurance or a new pair of boots. Digital solutions will help you meet desirable customers where they are and offer new products and services that you otherwise would not.
  3. Expand your partnerships: Agencies struggling to secure carrier appointments should consider partnering with those that already have them for mutual success. Furthermore, carriers can partner with adjacent businesses that share their customer profile and complement their offerings. You can use APIs to bridge into a partner’s experience through embedded offers and reach new customer segments.

It’s easier said than done, but try not to lose sleep over our current climate. The insurance market is cyclical, which means it’ll eventually swing back to sunnier skies. Regardless of the economic circumstances, it’s critical to stay prepared for the good times and the bad. Investments in the right technology and partnerships will help you tackle whatever obstacles lie ahead.

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Author: CMR

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