Navigating a Hard Property & Casualty Market Cycle

By Scott Popilek, Risk Strategies Atlantic Region Leader

Navigating a Hard Property & Casualty Market Cycle

Over my twenty years as an insurance broker I have guided many clients through numerous hard market cycles. Prior to our current hard market, those cycles would typically last for 12-18 months; however, based on a number of factors, many experts indicate the current hard market could last for well over 24 months. Let’s understand factors driving this environment, and then we will turn our attention to proven strategies that have helped companies successfully navigate prior hard markets.

Factors driving hard market conditions:

  • Increased frequency and severity of Catastrophic Events worldwide.

These include Hurricanes, Wildfires, Typhoons, Earthquakes, Tsunamis, Severe Convection Storms, and Flooding. Average Insured Cat losses over the last 3 years has increased to $62b.

  • Social Inflation on loss settlements

Many lines of coverage are experiencing an increase in both the number of larger jury verdicts as well as a massive increase in the severity of related payouts. The hardest hit areas are Auto Liability and Umbrella/Excess lines. Companies are experiencing average rate increases of 10% and 17% respectively.

  • COVID-19 Pandemic

Industry estimates indicate that insured losses from COVID-19 will be between $60b - $100b, paying out over the next 5 years. This would make the pandemic one of the top ten insured loss events of all time.

  • Reduction of Direct Written Premiums

Estimates are that Direct Written Premiums will reduce dramatically over the next 12 months as insureds struggle to get back to pre-COVID-19 employment and revenue levels. This reduction will put significant strain on the financial stability of certain insurance carriers and may force some to either go out of business or merge with their peers.

  • Low Yield Bond Market

Insurance carriers will be subject to lower investment returns on a significant portion of their invested assets. Treasury rates dropped from 2.27% in 2019 to 0.67% in 2020. Carriers that insure longer tail losses will be especially impacted.

  • Carrier’s Financial Condition.

With decreased investment income, an uncertain stock market, and rising claims costs, carriers will be increasingly focused on their financial health and achieving their desired ROI/ROE. Achieving proper profitability levels will help in mitigating the risk of potential downgrades from the various rating agencies (AM Best, Moody’s, Demotech). Non-renewing difficult risks, reducing coverage and raising rates will be the main strategies carriers implement to achieve these returns.

There is some good new here.

The insurance industry has not only weathered (pun intended) most of these challenges over the last few years, but has also grown capacity to over $820b prior to COVID-19. Estimates today have that capacity at around $775b, which is a clear indication that the market is generally in a favorable position to handle increasing costs of both COVID-19 and recent catastrophic events.

So if the market is in such good shape, then why are we experiencing a hard market? The answer is…the past is no longer a good indicator of our future. Insurance Carriers have always leveraged past loss experiences to model and predict the future. This was done so they could set the appropriate pricing levels for the coverage they offer. This historical data has typically enabled the industry to successfully develop loss projections allowing them to feel confident that pricing would be adequate to cover both current and future loss payments.

Essentially the problem now, is that the past few years have seen a material increase in the number of larger loss events/claims with payouts also much larger than what we’ve seen historically. This means that instead of pricing for a catastrophic loss and/or a massive jury verdict every 2-3 years the industry now needs to price for these types of losses every year. It will take some time for the industry to adjust to this new reality and over the next few years it may be somewhat of a guessing game.

Over the last 5 years we’ve seen most carriers move to analytic modeling programs to assist them in understanding what this future loss reality could look like, and assist in setting the appropriate pricing levels going forward. These programs have also given them greater insight in to what characteristics make up a quality risk.

What you can do to navigate this new reality:

There’s no silver bullet here, but as a business there are some meaningful steps you can take to successfully navigate these difficult market conditions and come out on the other side in a much stronger position. Steps are as follows:

  • Consider all Program Options

There may be a need/opportunity for companies to assume risk over the next 24 months in order to manage their cost of insurance. Many of these solutions could drive greater financial efficiency then your current program. This could be especially true if you’re in a program where you’re not taking any risk. Options include: Deductible Programs, Self-insured Retentions, Retrospectively Rated Programs, moving to Qualified Self-insured.

  • Evaluate Alternative Risk Solutions

For certain companies, various captive strategies may also be an option for consideration. They can drive cost savings, smoothen out current rate increases as well as give the client greater control over how their claims management. Options include: Group Captives, Rent-a-Captives, Single Parent Captives and 831(b) Captives.

  • Enhance your Safety & Loss Control Programs

Minimizing/Eliminating your losses will make you more attractive to the market, thus resulting in more favorable pricing and coverage terms. It will also give you greater confidence to implement any of the above options identified in the first two bullets. All companies should have their broker conduct a review of their current program to identify deficiencies as well as build out a plan to address those deficiencies. Having this included in your renewal submission will help you achieve more favorable pricing and coverage terms.

  • Enhance your Claims Management Processes

Once an incident occurs, companies that are able to successfully execute their claims protocols resulting in lower claim payouts and faster closure rates will be more attractive to the market. Also, as above, it will give you greater confidence to engage in a strategy that requires you to take risk.

  • Enhance the Quality of your Underwriting Data

The concept of garbage in garbage out has never been truer than in today’s insurance marketplace. With more carriers relying on analytical underwriting platforms the better the data provided the better the pricing.

  • Work Closely with Brokers that Know your Industry

If underwriting lacks the confidence in what the broker is presenting to them, they will not put their best renewal terms forward. You get one chance to make a first impression. Also, lack of broker expertise may also result in weaker coverage forms that could result in uncovered claims.

The most effective way to achieve the best outcome is to engage in a Total Cost of Risk (TCOR) Analysis. This analysis will educate you on all the program options available for consideration, ensure your Safety & Loss Control programs are optimized, and ensure your Claims protocols are aligned with best practice. The analysis will also provide an overview of the potential financial efficiencies your company can achieve through implementing a risk bearing program.

If you’re interested in learning more about our Total Cost of Risk Analysis please reach out to me at

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