Hard Market vs. Soft Market: The Insurance Industry’s Cycle and Why We’re Currently in a Hard Market | 

Pasar Sulit Vs Pasar Mudah dalam Industri Asuransi

All industries experience cycles of expansion and contraction, and this is particularly true of the insurance industry. Although no two cycles are exactly the same, insurance industry cycles typically last from two to ten years and incorporate phases marked by an expansion and a contraction of insurance availability. After experiencing a soft market in the insurance industry for approximately eight years, the market began to level off in 2011 due to a combination of factors. By the end of 2012, the soft market had bottomed out and we are now facing a hard market.

What is a hard market vs. a soft market?

The characteristics of a soft market in the insurance industry include:

• Lower insurance premiums
• Broader coverage
• Relaxed underwriting criteria, which means underwriting is easier
• Increased capacity, which means insurance carriers write more policies and higher limits
• Increased competition among insurance carriers.

Ultimately these rate reductions associated with a soft market affect the insurance carriers’ bottom line, as an insurer relies on a combination of insurance premiums and investment income to make a profit as a company.

On the other hand, the characteristics of a hard market include:

• Higher insurance premiums
• More stringent underwriting criteria, which means underwriting is more difficult
• Reduced capacity, which means insurance carriers write less insurance policies
• Less competition among insurance carriers.

Why are we currently facing a hard market?

A string of natural disasters and the residual effects of the economic downturn have been the main causes for this change in the insurance cycle from soft to hard market conditions.

• Mother Nature: Germany’s Munich Re, one of the world’s leading reinsurers, rated 2011 as the worst year in history in terms of losses due to natural catastrophes worldwide. In the U.S. alone, we experienced numerous high-level tornadoes in the Southeast and Midwest, significant flooding on the East coast, a drought in the South and a massive winter blizzard and summer hailstorms in the Midwest. And in 2012, the trend has continued with the impact of Hurricane Sandy. Worldwide, one of the strongest earthquakes ever recorded shook Japan, a widespread drought struck East Africa, the worst flooding in 50 years occurred in Thailand and a major typhoon hit the Philippines. For insurance carriers, all of these significant natural disasters meant a large increase in claims. When losses are high due to natural disasters, carriers reserves are reduced, and insurance companies look to replenish reserves by increasing rates. Zurich-based reinsurance company Swiss Re, reported that insurers sustained $116 billion in losses from natural catastrophes and man-made disasters in 2011. Swiss Re Ltd. also reported that the total economic losses, both insured and uninsured, due to disasters reached an estimated $350 billion, making 2011 the year with the highest catastrophe-related economic losses in history.

• Economic Downturn: During the insurance industry’s soft market when rates were extremely low, insurance carriers relied on their return on investments to make money. Whereas carriers used to shoot for and obtain double digit return on investments, now they are only seeing between three and five percent return. Carriers are no longer making the investment income they once had. As a way to counteract these investment losses, rates have begun to escalate.

In addition, there are two things that effect business insurance premiums – payroll and revenue. As companies began experiencing a decrease in revenue and consequently started to lay off employees, both their payroll and revenue decreased, which in turn meant a decrease in premium to the insurance carrier. This is another way in which the carrier is losing money due to the economic downturn.

What can we expect from insurance carriers during a hard market?

During a hard market, underwriting gets tougher and more stringent. With each year, underwriters are becoming more sophisticated, looking more closely at losses, safety records, and financials. We are seeing insurance carriers dig deeper into a company’s financials than in the past. Most insurance underwriters today want a five to ten percent higher rate upon renewal, and some are requiring substantially more. Rates will vary from carrier to carrier and will depend on a business’s inherent risks, claims history, and finances.

What does the future of this hard market look like?

All industries experience cycles of expansion and contraction, and this is particularly true of the insurance industry. Although no two cycles are exactly the same, insurance industry cycles typically last from two to ten years and incorporate phases marked by an expansion and a contraction of insurance availability. After experiencing a soft market in the insurance industry for approximately eight years, the market began to level off in 2011 due to a combination of factors. By the end of 2012, the soft market had bottomed out and we are now facing a hard market.

What is a hard market vs. a soft market?

The characteristics of a soft market in the insurance industry include:

• Lower insurance premiums
• Broader coverage
• Relaxed underwriting criteria, which means underwriting is easier
• Increased capacity, which means insurance carriers write more policies and higher limits
• Increased competition among insurance carriers.

Ultimately these rate reductions associated with a soft market affect the insurance carriers’ bottom line, as an insurer relies on a combination of insurance premiums and investment income to make a profit as a company.

On the other hand, the characteristics of a hard market include:

• Higher insurance premiums
• More stringent underwriting criteria, which means underwriting is more difficult
• Reduced capacity, which means insurance carriers write less insurance policies
• Less competition among insurance carriers.

Why are we currently facing a hard market?

A string of natural disasters and the residual effects of the economic downturn have been the main causes for this change in the insurance cycle from soft to hard market conditions.

• Mother Nature: Germany’s Munich Re, one of the world’s leading reinsurers, rated 2011 as the worst year in history in terms of losses due to natural catastrophes worldwide. In the U.S. alone, we experienced numerous high-level tornadoes in the Southeast and Midwest, significant flooding on the East coast, a drought in the South and a massive winter blizzard and summer hailstorms in the Midwest. And in 2012, the trend has continued with the impact of Hurricane Sandy. Worldwide, one of the strongest earthquakes ever recorded shook Japan, a widespread drought struck East Africa, the worst flooding in 50 years occurred in Thailand and a major typhoon hit the Philippines. For insurance carriers, all of these significant natural disasters meant a large increase in claims. When losses are high due to natural disasters, carriers reserves are reduced, and insurance companies look to replenish reserves by increasing rates. Zurich-based reinsurance company Swiss Re, reported that insurers sustained $116 billion in losses from natural catastrophes and man-made disasters in 2011. Swiss Re Ltd. also reported that the total economic losses, both insured and uninsured, due to disasters reached an estimated $350 billion, making 2011 the year with the highest catastrophe-related economic losses in history.
• Economic Downturn: During the insurance industry’s soft market when rates were extremely low, insurance carriers relied on their return on investments to make money. Whereas carriers used to shoot for and obtain double digit return on investments, now they are only seeing between three and five percent return. Carriers are no longer making the investment income they once had. As a way to counteract these investment losses, rates have begun to escalate.

In addition, there are two things that effect business insurance premiums – payroll and revenue. As companies began experiencing a decrease in revenue and consequently started to lay off employees, both their payroll and revenue decreased, which in turn meant a decrease in premium to the insurance carrier. This is another way in which the carrier is losing money due to the economic downturn.

What can we expect from insurance carriers during a hard market?

During a hard market, underwriting gets tougher and more stringent. With each year, underwriters are becoming more sophisticated, looking more closely at losses, safety records, and financials. We are seeing insurance carriers dig deeper into a company’s financials than in the past. Most insurance underwriters today want a five to ten percent higher rate upon renewal, and some are requiring substantially more. Rates will vary from carrier to carrier and will depend on a business’s inherent risks, claims history, and finances.

What does the future of this hard market look like?

Terjemahan Bebas:

Pasar Sulit vs. Pasar Lunak: Siklus Industri Asuransi dan Mengapa Kita Saat Ini Berada di Pasar Sulit
Semua industri mengalami siklus ekspansi dan kontraksi, dan ini terutama berlaku untuk industri asuransi. Meskipun tidak ada dua siklus yang persis sama, siklus industri asuransi biasanya berlangsung dari dua hingga sepuluh tahun dan mencakup fase yang ditandai dengan perluasan dan penyusutan ketersediaan asuransi. Setelah mengalami pasar yang lemah di industri asuransi selama kurang lebih delapan tahun, pasar mulai mendatar pada tahun 2011 karena kombinasi berbagai faktor. Pada akhir tahun 2012, pasar lemah telah mencapai titik terendah dan kami sekarang menghadapi pasar yang sulit.
Apa itu pasar keras vs pasar lunak?
Ciri-ciri soft market dalam industri asuransi antara lain:

1. Premi asuransi yang lebih rendah,
2. Cakupan jaminan yang lebih luas,
3. Kriteria underwriting yang rileks, artinya underwriting lebih mudah,
4. Peningkatan kapasitas, yang berarti operator asuransi menutup lebih banyak polis dan batas kapasitas yang lebih tinggi,
5. Meningkatnya persaingan di antara operator asuransi.

Pada akhirnya, penurunan tarif yang terkait dengan pasar lunak ini memengaruhi keuntungan perusahaan asuransi, karena perusahaan asuransi mengandalkan kombinasi premi asuransi dan pendapatan investasi untuk menghasilkan keuntungan perusahaan.

Di sisi lain, karakteristik hard market meliputi:

1. Premi asuransi yang lebih tinggi,
2. Kriteria underwriting yang lebih ketat, yang berarti underwriting lebih sulit,
3. Kapasitas berkurang, yang berarti operator asuransi menutup lebih sedikit polis asuransi,
4. Lebih sedikit persaingan di antara operator asuransi.

Mengapa saat ini kita menghadapi pasar yang sulit?

Serangkaian bencana alam dan efek sisa dari penurunan ekonomi telah menjadi penyebab utama perubahan dalam siklus asuransi dari kondisi pasar lunak menjadi kondisi pasar yang sulit.

• Alam: Munich Re Jerman, salah satu perusahaan reasuransi terkemuka di dunia, menilai 2011 sebagai tahun terburuk dalam sejarah dalam hal kerugian akibat bencana alam di seluruh dunia. Di AS saja, kami mengalami banyak tornado tingkat tinggi di Tenggara dan Barat Tengah, banjir yang signifikan di pantai Timur, kekeringan di Selatan dan badai salju musim dingin yang besar serta badai es musim panas di Midwest. Dan di tahun 2012, tren tersebut berlanjut dengan dampak Badai Sandy. Di seluruh dunia, salah satu gempa bumi terkuat yang pernah tercatat mengguncang Jepang, kekeringan yang meluas melanda Afrika Timur, banjir terparah dalam 50 tahun terjadi di Thailand dan topan besar melanda Filipina. Bagi operator asuransi, semua bencana alam yang signifikan ini berarti peningkatan besar dalam klaim. Ketika kerugian tinggi karena bencana alam, cadangan operator berkurang, dan perusahaan asuransi berupaya mengisi cadangan dengan menaikkan tarif. Perusahaan reasuransi yang berbasis di Zurich, Swiss Re, melaporkan bahwa asuransi mengalami kerugian $ 116 miliar akibat bencana alam dan bencana buatan manusia pada tahun 2011. Swiss Re Ltd. juga melaporkan bahwa total kerugian ekonomi, baik yang diasuransikan maupun yang tidak diasuransikan, akibat bencana mencapai perkiraan. $ 350 miliar, menjadikan tahun 2011 sebagai tahun dengan kerugian ekonomi terkait bencana terbesar dalam sejarah.

• Penurunan Ekonomi: Selama pasar industri asuransi yang lemah ketika tarif sangat rendah, operator asuransi mengandalkan laba atas investasi mereka untuk menghasilkan uang. Jika operator biasanya mencari dan mendapatkan laba atas investasi dua digit, sekarang mereka hanya melihat antara tiga dan lima persen pengembalian. Operator tidak lagi menghasilkan pendapatan investasi yang pernah mereka miliki. Sebagai cara untuk mengatasi kerugian investasi ini, suku bunga mulai meningkat.Selain itu, ada dua hal yang mempengaruhi premi asuransi bisnis – gaji dan pendapatan. Ketika perusahaan mulai mengalami penurunan pendapatan dan akibatnya mulai memberhentikan karyawan, gaji dan pendapatan mereka menurun, yang pada gilirannya berarti penurunan premi kepada perusahaan asuransi. Ini adalah cara lain di mana pengangkut kehilangan uang karena kemerosotan ekonomi.

Apa yang dapat kita harapkan dari operator asuransi selama pasar yang sulit?
Selama pasar yang sulit, penjaminan emisi menjadi lebih ketat dan lebih ketat. Setiap tahun, penjamin emisi menjadi lebih canggih, melihat lebih dekat pada kerugian, catatan keselamatan, dan keuangan. Kami melihat operator asuransi menggali lebih dalam tentang keuangan perusahaan daripada di masa lalu. Sebagian besar penjamin emisi asuransi saat ini menginginkan tarif lima hingga sepuluh persen lebih tinggi saat perpanjangan, dan beberapa memerlukan lebih banyak secara substansial. Tarif akan bervariasi dari satu pengantar ke pengantar lain dan akan bergantung pada risiko bisnis yang melekat, riwayat klaim, dan keuangan.

Seperti apa masa depan pasar keras ini?