Hard vs soft: How to navigate the insurance cycle
- In a hard market, insurers are firmer with pricing and conservative with risk selection
- Experts say the industry is experiencing the hardest market in 50 years
- Planning ahead, relationship strategies and a service focus are key to success in a hard market.
Like most markets, insurance works in a cycle. It changes over time, softening and hardening in response to economics, natural disasters, politics and more. Navigating this change may be challenging for both Authorised Representatives and their customers, however businesses can remain sustainable and successful - even when the market shifts - by taking a strategic approach.
QBE Sales Hub Manager Justin Boyes and National Partnership Manager John Schroder, who work closely with QBE’s Authorised Representative partners to reach their business goals, believe understanding the insurance cycle is key to this approach and businesses can "position for growth" regardless of market conditions.
What is a hard and soft market?
"A hard market is when insurance companies are firmer in their pricing and risk selection, less likely to discount and in some cases aren’t able to discount at all," says Boyes.
Typically, premiums going up are a key indicator that the market is hardening. However, another clue the market has shifted is a reduced capacity for insurers to take on certain risks.
"The primary consideration in a hard market is finding an insurer that wants to write some risks," says Schroder. "In a hard market, your options can be limited. A hard market is driven by capacity and underwriter appetite."
In contrast, a soft market is when "insurance companies are likely to take on a little bit more risk than they normally would at a lower premium," says Boyes. He believes that in a soft market, "price is often the key driver on whether or not business is written, and the market is highly competitive."
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So what market are we currently in?
"I spoke to a broker the other day who’s been doing this for 50 years. He said it's the second time in 50 years he’s seen it as hard as it is," says John.
"Right now, interest rates are at an all-time low, leading to lower investment returns for insurers. This means that there is a stronger focus on underwriting profitability and insurers are being more selective about risk. With more frequent catastrophes, insurers are seeing increases in claims severity and the cost of reinsurance is rising. Almost all insurers have gone through a cost adjustment exercise."
Boyes agrees. "In a typical insurance cycle, a hard market follows a soft market, and we have come out of a long and sustained soft market cycle in which insurer pricing was lower, coverages were wider and there was an abundance of underwriter capacity."
"Even if the market softens slightly, underwriting capacity is still going to be the first and foremost thing," he says. "So, while we’re in a moderate growth phase now, our core underwriting values aren’t going away."
How does this affect Authorised Representatives?
Authorised Representatives are impacted by market conditions, however it may not be in the way you think. "Generally, income is going to be consistent regardless of the market," says Schroder. "Where you really maximise commission is by the amount of time you spend on it over the dollars you generate."
For example, if you spend a day placing one risk then that may be considered a good day. However, if you spend half a day placing the same business, then that's a better day. It’s this time investment that is the key difference between a hard and soft market.
"At a policy level you may make less money on a policy than you did a few years ago because the premium keeps going down," says Boyes. "But because it’s a soft market and it’s easier to place business, you’ve written five others with less effort and time."
"Whereas in a hard market you can actually earn more money… but you’ll really need to spend time trying to win that business. You’re less likely to take on new business and more likely to just hold on to the policies that you’ve got. You’re likely going to supplement the new business income you would have had because the premiums are coming up. It’s a balancing act. The most valuable thing that you have to give is time. So, the question is where are you going to get the most return for your time?"
Plan ahead for success in both markets
Ultimately "fortune favours the proactive in both of those cycles," says Schroder. "You can make a significant profit and support customers in both markets just by planning."
One key component is to "pay attention to insurer communication to understand what kind of market you’re in," says Boyes. "For example, if you have an insurer saying ‘we don’t have an appetite for this industry anymore so we’re going to stop writing it’ and other insurers agree, then you know that it's going to be harder to place that risk for your client… and the market is likely getting harder overall."
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This means you need to look at where your portfolio sits and plan ahead for your current clients or any new business that you’re trying to acquire. For example, you may have a client that has two or three adjustments they need to make in order for the policy terms to be offered in a year’s time. If you’re a week out of renewal and prompt your client, who is often busy running their own business, and those risk issues are not resolved, you may have difficulty placing that risk again in a harder market.
"Set up a prompter through the year to get into a workflow," advises John. "You’re giving the end client enough time to do it. You're giving yourself a calendar invite or prompt to ask the question... and you can engage the insurer early on so that minor issues won’t hinder their decision in a tougher market. It’s getting into that routine and doing that on mass scale for all clients."
Build a relationship with your insurer
Another element of success in both a hard and soft market is to build a strong relationship with your insurer. "The best way to work with insurers is to gain that element of trust. Really get to understand the type of risk appetite each insurer has, because it’s going to be slightly different. Once you understand the risk profile that insurers are looking for, that then gives you the ability to place business," says Boyes.
It’s also imperative when you work with your insurer that you tell them everything - warts and all. "Then we will do our best to push that through for you. Tell us the good and the bad. We’ll work with you on it. It’s about trust. It’s about knowing that everything is 100% accurate and transparent." It’s not only important to building trust, but in keeping your client protected, adds Boyes.
Be transparent with your clients
Just as you should be transparent with your insurer, you should also be completely honest with your clients, especially when it comes to increased premiums. "As hard as this is," John says, "talk to your customer about the market at the moment - it’s not driven by premiums. The priority is actually to find a home for their risk and find an insurer that is willing to write it."
You should also be able to rely on your insurer to do the right thing, let you know in advance that premiums are going up and explain why. This means that you can then pass that onto your clients.
"Most brokers will be doing a fact find about two or three months out. So that’s where you can make a phone call to your client and check in," says Boyes. "You should have a fairly good idea by then whether or not the premiums are going to go up. You can warn them at that time. It helps set expectations."
Ultimately, Justin believes, your clients simply want an explanation that they can make sense of to justify the premium being charged. If you can give them that information, then "they’re usually okay with it and they still perceive you as a trusted advisor."
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Focus on your service, not just price
It’s unlikely the market will change dramatically any time soon believes Boyes. "The past is generally a good predictor of what’s going to happen in the future. If you look over the last twelve months of your business, have you grown? Have you spent more time with your clients? Are the interactions with your insurer more complex? Expect that trend to continue."
What’s important is that you focus on the value of the service you provide to your customers and "be confident that your service stacks up against whatever price is coming through on premiums," says Schroder. That means whether it’s a hard or soft market, you can demonstrate to the end client that "your service proposition is worth whatever commission rate you’re charging." It’s the service, knowledge, and relationships you bring that deliver value, particularly in a hard market.
"Service is the most important thing regardless of the market," agrees Justin. "Whether it’s hard or soft, the type of service you provide may look different, but a good Authorised Representative is an expert – a trusted advisor – and you provide a greater service than the next person. That’s how you’re going to keep business."
Want to know more about the current insurance market? Talk to your Business Relationship Manager or join one of our exclusive webinars for more information.