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Hard markets and Soft markets

Hard market, soft market, transitional market – all are terms that insurance industry veterans have used to characterize the various stages of the “insurance industry underwriting cycle”. Simply put, a hard market is when insurers are backing out of the market, insurance is expensive and getting more so, difficult to find, and likely limited when it can be obtained. Soft markets typically are marked by new entrants into the business, dropping prices, generous underwriting provisions, and aggressive discounting.
We are now in a soft market, especially in California. The next question is how did we get here and how long will it last.
Well, we got here because insurers raised rates for three years in a row beginning in 2001, thereby driving margins, and profits, up substantially. This newly profitable industry caught the attention of outside capital, which wanted to jump in on the action. Remember, those with lots of money to invest can put it into bonds (at very low interest rates) equities (with their only slightly better returns with much more risk), real estate (prices are high and speculation of a bubble rampant), or under a very large mattress.
So, among other insurance lines, workers comp looked especially good. And lots of capital jumped in, causing prices to drop. They are still declining.
The second part of the question is much harder to answer – but there are some indicators that predict it will not last nearly as long as the soft market of the late nineties. Most significant is the continued rapid increase in medical expenses. In workers comp, most medical expenses are paid out more than 12 months after the date of injury, and fully 1/3 of dollars are paid more than 36 months post injury. It is incredibly hard to accurately predict what medical inflation will do to a claim’s medical costs. And, all indications are that medical expenses in WC are rising faster than in the overall economy.
You can find an excellent review of past markets, market drivers, and other useful info at the American Association of State Compensation Insurance Funds. While the report is somewhat dated, the logic is not.
What does this mean for you?
Enjoy the soft market if you are a buyer, hope it ends soon if you are a seller, and whoever you are, remember that medical expense will drive the next hard market.

Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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