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, meaning 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 fewer 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 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 returns. 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 affect 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?
We first saw the effects of the hard marked in the commercial industry. Commercial insurance prices in total rose by six percent during the second quarter of 2012 compared to the same quarter the prior year. But we are now seeing a hard market in the personal insurance market as well, especially with homeowners insurance. As an industry, we expect rates to continue to increase in 2013 through the next two to three years.
[psa_cta id=”13997″]What Can You Do in a Hard Market When You Are Seeing Rates Increase?
While you will most likely need to be prepared for some rate increases due to the insurance industry’s hard market, there are several things you can do to help minimize the impact of the more stringent underwriting criteria your company will face:
- Because the market and underwriters are becoming more restrictive, it is imperative that a company’s management is involved with and committed to its safety programs.
- Take a more active and strategic approach to managing your company’s risks and insurance claims.
- Start your insurance renewal process earlier, both on a commercial and personal level.
- Be even more cognizant of your company’s financials – most insurers are looking at whether bills are being paid on time and many insurers are using third party services to conduct credit scores.
Update as of 2025
As we move through 2025, the insurance market continues to reflect characteristics of a prolonged hard market. Although rate increases have stabilized somewhat compared to the sharp upticks seen in prior years, most businesses and individuals are still facing elevated premiums, stricter underwriting standards, and reduced capacity across multiple lines of coverage.
Key 2025 Market Trends:
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Rate Increases Continue, But Are More Targeted: While across-the-board hikes have slowed, rate increases are now being applied more selectively, focused on industries or regions with poor loss histories, natural catastrophe exposure, or high-risk activities.
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Climate-Driven Catastrophes Still Driving Claims: Ongoing climate-related events, including wildfires, hurricanes, and severe flooding, have continued to drive up claims costs. As a result, many carriers are reevaluating their appetite for risk in specific geographies.
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Underwriting Is More Data-Driven: Insurers are increasingly relying on AI and advanced analytics to assess risk. That means carriers are looking deeper at financial performance, claims trends, credit data, and safety initiatives when pricing coverage and deciding whether to renew.
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Cyber and Auto Markets Remain Volatile: Cyber liability insurance remains one of the fastest-rising segments, with premiums up significantly due to the continued rise in ransomware and data breach incidents. In the auto space, rising vehicle repair costs and distracted driving claims are contributing to sustained rate pressure.
What This Means for Policyholders:
Businesses and individuals should continue to expect a competitive, challenging insurance environment. However, well-managed organizations with proactive risk mitigation strategies and clean claims histories are still seeing favorable outcomes, especially when working closely with experienced brokers who can market accounts effectively.
If your insurance costs have increased or your coverage has changed, it may be time to reevaluate your program. Risk management, strong financial documentation, and early renewal preparation remain your best tools for navigating the market in 2025.
If you have any questions regarding your rates or need business insurance, contact me at bmarx@psafinancial.com.
