This Hard Market Explained

This hard market is the longest and hardest in generations. Historically, hard markets occurred every seven years or so and lasted two to three years.

Agents that sold price and represented carriers who sold price worked hard during the soft market and then failed in the hard market because their carriers wouldn’t have the surplus–i.e., capacity–to grow. The more patient carriers could coast during a soft market and then clean up for two to three years, writing everything that came their way for the price they wanted. Over time, the carriers better managed for hard markets had more success, but their trajectory was not smooth.

This hard market was preceded by the longest and, for three years, the deepest soft market ever. The soft market lasted for about 15 years! For three years, premiums actually decreased. It was an unprecedented market. And now the market is harder than any time since about 1985, and that was a casualty-driven hard market, while this is more of a property-driven hard market.

What Happened?

What happened to cause the market to go from incredibly soft to incredibly hard?

As always, hard markets are caused by a lack of surplus. I base my analysis on my in-depth industry research. I do my best to avoid explaining away the hard market using insipid explanations like global warming and nuclear verdicts and wildfires (though wildfires play a part in this market, just not from the perspective usually presented). If nuclear verdicts were damning, the industry would not have achieved record profits and the third lowest combined ratio in 30 years in 2024.

The true cause of this hard market is self-inflicted. It began in 2018. The impact of the carriers’ decisions made in 2018 were not felt until 2021-2022. Some delay is normal, and then COVID happened, which muddied the waters more.

What happened had nothing to do with claims. Instead, in 2018, carriers forewent the purchase of large amounts of reinsurance. It was likely the largest decrease in reinsurance purchased ever. They bought so much less reinsurance that their net growth rate (versus their direct growth rate) more than doubled what it otherwise would have been.

Not all carriers did this. But the carriers who did, which were primarily stock carriers with one large mutual, decreased their reinsurance purchases so much they moved the entire market. Their reasoning was that reinsurance was too expensive. Their hope, largely successful, was for everyone to believe reinsurance was too expensive for everyone. In reality, most had profit problems and reinsurance was just too expensive for them. There is a difference between something costing $100 for a person with good income versus someone with financial issues.

Wrong Bet

The carriers and the market rolled the dice. They thought they initially won. But the reason we still advise not to count your chickens before they hatch is this is really good advice.

In 2022, carriers lost a record amount of surplus. They didn’t lose it because of claims and nuclear verdicts. They lost it because their chief investment officers bet that interest rates would not increase. When interest rates are already at the bottom of the bottom, what is the most probable direction for interest rates to go? Just asking.

They bet wrong, so when interest rates increased, their investment portfolios decreased significantly. When investment portfolios decrease, so does surplus. Now they have less reinsurance and less of their own money.

Then, the derechos hit areas that were considered fairly weather safe. Those claims were particularly problematic because some carriers who did not specialize in reinsurance reinsured tiny carriers within the same geographic area for the same perils that they themselves insured on a primary basis. The loss ratios for some went to 999.99%. It was another example of bad management by failing to observe a primary rule of underwriting: diversify your risk.

And then rates increased significantly, as they do in hard markets.

Now, some carriers cannot afford to buy reinsurance, but they need to increase their surplus. This is why some carriers are selling divisions, real estate, and so forth. They need the cash. I believe one major carrier has now sold at least five major assets in an effort to regain the 40% of surplus it had lost.

Even the record profits earned during the past two years are not enough to fill the gap for several reasons.

First, profits are not proportionate. Progressive made approximately $8 billion in 2024, which is more money than all but about 15 carriers have in total revenue!

Second, stock companies need to maintain their stock price, which means maintaining dividends. They are paying dividends that arguably should be used to shore up surplus.

Third, wildfires and floods–but not due to the actual losses. The real issue is bad mapping and underwriting. Finding wildfire exposures everywhere with as much accuracy as a sawed-off 12-gauge at 100 yards has hardened the market unnecessarily. Carriers are loath to be accused of not paying attention to these perils, even if their basis is using maps as accurate as pre-Columbus maps showing a flat Earth and fire-breathing dragons along the perimeter. Carriers would rather forego opportunities to increase market share and grow intelligently than take the slightest, tiniest risk of a wildfire claim. The situation is so bad that no market exists at any price in large geographic areas today.

Red Herrings

This has nothing to do with global warming, other than global warming is an awesome red herring. It is due simply to bad underwriting and bad mapping. No technology is required to fix it. A willingness to think and examine basic photos is all that is needed. Critical thinking versus software thinking.

The awful litigation environment in places like Florida, Georgia, and New Mexico, and the incompetent regulators in other states exacerbate the core problem, but these are not the core factors.

To summarize, this is a man-made hard market. It was set in motion with the decision to buy much less reinsurance than normal, followed by bad investment strategies, exacerbated by an unwillingness to think. It is not even a matter of an unwillingness to take a risk because the risk is minimal if one thinks through the actual risk and looks at true photos and better maps. The winning agencies, carriers, and individuals will be those who identify the opportunities where others see only doom and gloom.

Topics Pricing Trends Market