All industries experience cycles of expansion (soft market) and contraction (hard market). In a soft market, we enjoy lower insurance premiums, relaxed underwriting criteria, increased capacity, and more competition amongst insurance carriers. While a hard market brings higher insurance premiums, more stringent underwriting criteria, reduced capacity, and less competition. These cycles hit every part of our country, although the impact by state – or even by regions within the same state – will vary.

There is no doubt that we are deep into a hard market.  What makes this hard market unique is that we slammed into it coming out of an extremely soft market.

In 2020, people stopped driving and they were home to catch or prevent major home losses from occurring.  As a result, carriers slashed premiums.  On top of that, they offered premium refunds, dividends, or give backs.  In 2021, the world returned to pre-pandemic driving levels sooner than anyone anticipated, so frequency spiked while premiums were at their lowest point.  Furthermore, due to the supply chain issues, loss costs skyrocketed.  In 2022, inflation and premium leakage emerged as a new trend, and reinsurance costs were up 60% year over year.  Reinsurance is insurance for insurance companies, and when the reinsurance premium on a policy is more than the policy premium itself, there is no way for the carrier to be profitable on that risk.  All industry data shows loss severity, inflation, and reinsurance continuing to trend up in 2023. 

Over the last 42 years, as a country, the US has averaged 8 weather and climate disasters annually.  This average has climbed to 18 in just the last five years.  In the last 3 years, we are averaging 20 weather and climate disasters, including floods, in the US.

The insurance industry recorded a net underwriting loss for 2022 of $26.9 billion, more than six times the $3.8 billion underwriting loss in 2021. The underwriting loss in 2022 was the largest the industry has seen since 2011.  The insurance industry is being hammered by increasing input costs, natural catastrophes, legal system abuse, and resistance in some states to adequate rates.  In 2023, insurers are faced with a significant challenge to close the rate gap in order to meet their growing cost of capital.

All of that means carriers are reacting.  They are raising rates as quickly as the Department Of Insurance (DOI) in each state will allow them, and they are tightening underwriting guidelines to slow new business and take on less risk.  We are also seeing carriers shut down in certain zip codes, counties, or in some cases, entire states.  We have even witnessed several carriers go insolvent.   

How long this hard market will last really depends on the state.  DOI friendly states, "File and Use" states, are going to recover quicker than states where the DOI restricts how many rate increases a carrier can take, the amount of the rate increases, underwriting/rating factors, etc.  Even in DOI friendly states, the actions of one carrier have a ripple effect on others.  When one carrier starts writing less business that business must go somewhere. If it doesn't fit the target market of those other carriers, they must react to block that business from coming in.  And so on.