The term “hard market” generally applies to the insurance and reinsurance sectors and the market cycles that apply to them. A hard market means the reinsurance sector sees more potential buyers than sellers.
In a hard market, it is more difficult for insurers (ceding companies) to find reinsurance at competitive rates and terms.
Why does this happen?
The hard market follows a soft market. During the soft market, the reinsurance companies took on too much risk for too little premium revenue. The increase in claims and payouts creates losses, which the reinsurance company must now recoup during the hard market cycle.
Some notable characteristics of a hard market in the reinsurance space are the following:
- Rising premium prices. Reinsurance companies must raise their rates to compensate for the losses experienced during the prior soft market cycle.
- More stringent underwriting standards. Reinsurance companies can be more cautious when taking on new risks during a hard market. The increase in insurer demand means the reinsurer can be more particular about the policy terms and its potential exposure.
- Decrease in Capacity. Because of the increased demand for reinsurance, a reinsurance company generally has no issues finding clients, which allows the reinsurer to use all of its available capacity. In contrast, during a soft market, the reinsurers have difficulty finding cedents, which means they have excess capacity.