The insurance market goes through cycles in much the same way as the stock market or the banking industry. The market will tighten and the rates and premiums go up. We refer to this as a “hard market”. The market will become a buyers market and the rates and premiums go down and we refer to this as a “soft market.”
These market cycles are usually driven by the abundance of underwriting capacity. When there are a lot of underwriters vying for business, the rates will be driven down. This competition will result in reduced rates to the point that the underwriters cannot pay their expenses and claims and still make a profit. At this point, some of the underwriting facilities will grow tired of the red ink and withdraw from the contest. With the reduced capacity comes reduced competition. This leaves the door open for the remaining companies to raise rates and the market will enter a hard market cycle. Once profitability is restored, new underwriters will enter the market and the cycle starts again.
These cycles continue every few years in response to the competition for business. In a hard market, not only do prices escalate, but underwriter cooperation and attitude tends to become more strained. Transitioning pilots, older pilots, older aircraft, the availability of high liability limits, among other things, become obstacles and difficult to obtain. In soft markets, the underwriters become very cooperative in approving requests for exceptions to normal underwriting standards. Such things as broader policy forms and increased liability limits are offered to the insured for very nominal increases in premium. In short, they offer what ever they can to be competitive.
We have been in a soft market cycle for about three years now. Historically, we are overdue for market hardening, as the typical cycle usually runs about three years from crest to crest. However, we have not yet seen the capacity withdrawal that usually precedes market hardening. As you plan for the future, know that the stage is set for increasing insurance premiums – we just don’t yet know exactly when that will begin.