The term “soft market” generally applies to the insurance and reinsurance industries and the market cycles that apply to them. A soft market means the reinsurance sector sees more potential sellers than buyers.
In a soft market, there is reinsurance capacity for everyone, which means reinsurers are battling each other for business. Some notable characteristics of a soft market in the reinsurance space are the following:
- Flat or falling premiums. When all else fails, reinsurance companies must lower their prices to compete for business.
- More relaxed underwriting standards. During a hard market, when reinsurance companies can be more cautious when taking on risk, a soft market removes that luxury.
- Excess capacity from lower demand. Reinsurance companies have to write policies and earn premiums to make money. This is similar to the banking sector, where banks can only survive if they loan money to customers and earn interest income. In a soft market where the demand is low, a reinsurance company may be able to take on more risk, but it can’t find a cedent to do business.
The soft market cycle generally leads to losses for the reinsurer. The combination of lower prices and relaxed underwriting standards causes reinsurers to pay out more claims and generate less revenue to cover the losses.