Hard vs soft: How to navigate the insurance cycle
Like most markets, insurance works in a cycle. It changes over time, softening and hardening in response to economics, natural disasters, politics and more. Navigating this change may be challenging for both Authorised Representatives and their customers, however businesses can remain sustainable and successful – even when the market shifts – by taking a strategic approach.
Steve Talbot, QBE Head of Qnect, Distribution, Australia, and Nicola Brown, QBE Qnect Team Leader, Distribution work closely with QBE’s Authorised Representative partners to reach their business goals. They believe understanding the insurance cycle is key to this approach and businesses can position for growth, regardless of market conditions.
What is a hard and soft market?
“A hard market is when insurance companies are firmer in their pricing and risk selection, less likely to discount and in some cases aren’t able to discount at all,” says Brown.
“Typically, premiums going up are a key indicator that the market is hardening. However, another clue the market has shifted is a reduced capacity for insurers to take on certain risks.
“The primary consideration in a hard market is finding an insurer that wants to write some risks,” says Talbot. “In a hard market, your options can be limited. A hard market is driven by capacity and underwriter appetite.”
In contrast, a soft market is when “insurance companies are likely to take on a little bit more risk than they normally would at a lower premium,” says Brown. She believes that in a soft market, “price is often the key driver on whether or not business is written, and the market is highly competitive.”
Related article: Negotiation tips
So what market are we currently in?
“Over the past year, the market has clearly started shifting – from a hard cycle towards a softer one,” explains Brown.
“For example, in Property, interest rates were climbing steadily a few years ago, but now we’re seeing rate reductions as competition increases.
“We’re also seeing insurers taking on risks they wouldn’t have previously or had capacity for.
“On top of that, underwriters are becoming more flexible on terms,” Brown says.
Talbot agrees. “There is a lot of movement in the market, and we’re seeing both brokers and customers shopping around,” he says.
“Brokers have more room to negotiate on price – but that doesn’t mean we’re in a soft market yet.
“Not all products are seeing premium drops, though there are definite signs of market softening.”
How does this affect Authorised Representatives?
Authorised Representatives are impacted by market conditions, however it may not be in the way you think. “Generally, income is going to be consistent regardless of the market,” says Talbot. “In broking, your commission isn’t just about the size of the premium – it's about how much time you spend placing the business.”
Generally speaking, in a soft market, you can place more policies quickly. In a hard market, you might earn more per policy, but it takes much more time and effort to place each one. So time investment is the key differentiator between a hard and soft market.
“At a policy level you may make less money on a policy than you did a few years ago because the premium keeps going down,” says Brown. “But because it’s a soft market and it’s easier to place business, you’ve written five others with less effort and time.”
“Whereas in a hard market you can actually earn more money… but you’ll really need to spend time trying to win that business. You’re less likely to take on new business and more likely to just hold on to the policies that you’ve got. You’re likely going to supplement the new business income you would have had because the premiums are coming up. It’s a balancing act. The most valuable thing that you have to give is time. So, the question is where are you going to get the most return for your time?”
Plan ahead for success in both markets
Ultimately “fortune favours the proactive in both of those cycles,” says Talbot. “You can make a significant profit and support customers in both markets just by planning.”
One key component is to “pay attention to insurer communication to understand what kind of market you’re in,” says Brown. “For example, if you have an insurer saying ‘we don’t have an appetite for this industry anymore so we’re going to stop writing it’ and other insurers agree, then you know that it’s going to be harder to place that risk for your client… and the market is likely getting harder overall.”
Related article: How to plan for business success
This means you need to look at where your portfolio sits and plan ahead for your current clients or any new business that you’re trying to acquire. For example, you may have a client that has two or three adjustments they need to make in order for the policy terms to be offered in a year’s time. If you’re a week out of renewal and prompt your client, who is often busy running their own business, and those risk issues are not resolved, you may have difficulty placing that risk again in a harder market.
“Set up a prompter through the year to get into a workflow,” advises Talbot. “You’re giving the end client enough time to do it. You're giving yourself a calendar invite or prompt to ask the question… and you can engage the insurer early on so that minor issues won’t hinder their decision in a tougher market. It’s getting into that routine and doing that on a mass scale for all clients.”
Build a relationship with your insurer
Another element of success in both a hard and soft market is to build a strong relationship with your insurer. “The best way to work with insurers is to gain that element of trust. Really get to understand the type of risk appetite each insurer has, because it’s going to be slightly different. Once you understand the risk profile that insurers are looking for, that then gives you the ability to place business,” says Brown.
It’s also imperative when you work with your insurer that you tell them everything – warts and all. “Then we will do our best to push that through for you. Tell us the good and the bad. We’ll work with you on it. It’s about trust. It’s about knowing that everything is 100% accurate and transparent.”
“It’s not only important to building trust, but in keeping your client protected,” adds Brown.
Be transparent with your clients
Just as you should be transparent with your insurer, it’s equally important to be honest with your clients – especially when premiums shift.
“Even in a transitioning market like now, it’s important to talk to your customers about what’s happening in the market and what’s driving it,” says Talbot.
“In much the same way, your insurer should be letting you know in advance what’s happening with premiums and explaining why. Then you can pass that on to your customers,” Talbot says.
“Most brokers will be doing a fact find about two or three months out. So that’s when you can make a phone call to your client and check in,” says Brown.
“You should have a fairly good idea by then whether or not the premiums are going to go up. You can warn them at that time. It helps set expectations.”
“Ultimately, clients just want a premium explanation they can make sense of. If you can give them that context, you maintain your credibility, as a trusted adviser,” Brown says.
“In a hard market, that might mean explaining why premiums are rising. In a transitioning market – like now – it could be about helping them understand why placement is easier, or why pricing is stabilising. Either way, transparency builds trust.”
Related article: Guide to coaching customers
Focus on your service, not just price
The best thing you can do as an Authorised Representative is focus on the value of your service, the knowledge you bring and the strength of your relationships, rather than try to predict what’s ahead in the market.
“Be confident that your service stacks up against whatever price is coming through on premiums,” says Talbot.
“That means you can demonstrate to your customer that your service proposition is worth whatever commission rate you’re charging."
“Service is the most important thing, regardless of the market,” agrees Brown.
“Whether the market is hard, soft, or in a transition phase like now, a good Authorised Representative knows that if you provide a greater service than the next person, you’ll keep business.”
Want to know more about the current insurance market? Talk to your Broker Manager or join one of our exclusive webinars for more information.