Hard or Soft: The end of market cycles?

February 15, 2022 Greg Brown

Q4 2018 saw the insurance market transition from the longest soft market in living memory to a hard market. Since then, primary corporate and speciality insurers have enjoyed the improving rates. In this article, we look at the current market cycle and assess how long it will last and whether the traditional concept of market cycles even applies in today’s world.

Market cycles: a changing dynamic

Historically the insurance markets have oscillated between a hard market – where capacity is scarce and prices rise – and soft market where capacity is more plentiful, competition rife and prices become suppressed. The market view is that this cycle happens on a roughly 5-7-year basis.

This changed following the financial crash in the late 2000s. The market softened and remained soft well past the 5-year mark. This is no surprise as interest rates remained low and capital continued to be readily available. Insurance was seen as a good investment, a place to achieve uncorrelated and larger returns than other markets.

In late 2018 following a couple of years of severe cat events (e.g. Hurricanes Irma and Harvey in 2017) and loss ratios often well above 100%, the insurance market started to turn. By 2020 there was a consensus view of a hard market.

In previous cycles, the question on everyone’s lips is ‘how long will it last?’. We think now that the market should be asking a different, better question:

Do traditional hard/soft market cycles exist anymore?

The current hard market – the factors driving a different ballgame

It’s inarguable that primary insurance is currently in a hard market. Having said that, we see four factors that hint that this market cycle is difficult and that maybe the traditional hard-soft market cycles don’t apply in the modern era.

Availability of capital

Firstly, capital is still readily available. Despite some early signs of interest rate shifts (e.g. Bank of England changing interest rates in Q4 2021 from 0.1% to 0.25%). Fundamentally, very little has changed since the banking crisis of the late 2000s. Capital is not constrained and cannot, therefore, be said to be driving the cycle.

Variation by class

Second, rate increases have varied significantly by class of business. Some classes (e.g. Property Cat) took an early lead in hardening and are expected to flatten off this year, whereas others (e.g. Global financial & professional lines) are still expected to rise significantly over the next twelve months. This is not the usual ‘rising tide’ that you would expect from a hard market.

Rate adequacy and certainty

Next, certainty around rate adequacy. For some lines of business, the market just doesn’t know enough to be certain about rate adequacy. Cat is a good example. With the evolving climate crisis, it will take time for underwriters to fully understand the implication on likely future losses and hence when rates can be considered sufficient to cover losses. Over recent years major cat events have increased in frequency and geographic reach, driven by climate change. For example, a scientific study showed that the 2021 major floods in western Germany were up to nine times more likely to happen due to climate change. Cyber is another example.

Given this is a relatively new area for the insurance industry, can it truly be said that we understand the losses likely to be incurred? Ransomware losses have been growing rapidly – estimated US ransomware payments made in H1 2021 were twice that of those made in the whole of 2020. Senior market views on rates have varied significantly: Chubb’s Evan Greenberg, commented on how rate increases appear to be ‘naturally slowing’ as the market approaches rates adequacy. In contrast, Gallagher CEO Pat Gallagher stated that he does not expect rate relief ‘in any form’, showing a lack of certainty in the market regarding the direction rates are heading.

Data and insight

Finally, and what feels like the most compelling argument for this market being different – data. Other industries might argue corporate and speciality insurance is not leading edge in its use of technology and data. However, a huge amount has changed in insurance since the early 2000s. Data is much more readily accessible to even the most traditional of insurers. This gives insurers insights into performance at the class and sub-class level, with some insurers now diving down to the asset level within a policy for their analysis. Insight from data will only increase as the promise of the ‘Bionic Underwriter’ becomes a reality. The UK personal lines motor market is a good case study – since the move to digital direct in the 2000s, the access to rich data has all but eliminated the traditional market cycle.

The Oxbow Partners View: The Future

These factors strongly suggest that things are different this time around. They indicate that possibly this hard market cycle is more of an amalgamation of ‘small waves’ rather an overall ‘tide’.

Having said that we do see these ‘small waves’ adding up to continued rate hardening over the next 1-2 years. We see over the longer term the market cycles waning and a change to ebbs and flows by product (sub)classes.

This change puts pressure on insurers to drive continual improvement in risk insights to be able to make these class and sub-class calls on pricing and underwriting. Now is the time to put the foundations of capability in whilst the market is hard, and profits exist with which to invest.