Insurance Premium Hardening

The insurance market cycle goes into cycles of premium hardening and softening. In times of hardening market, premium rise and in soft markets; premium rates shrink. What is more interesting is that the market cycle is independent of the general economic and business cycle. Some insurance experts say that the cycle changes each 6 to 7 years, but this is not evident.

First, let us describe the cycle. In hard markets, premium increase, competition eases and combined loss ratio becomes satisfactory. Due to the improved profitability, new entrants are attracted, competition heightens, premium rates drop and the market softens. Then, what happens is that profitability drops, combined operating ratio increases and the insurance market will not become attractive. And so on...

To note, the during the 9/11 attack era, premium increased by 500% and in 2011, although the insurance sector witnessed catastrophic losses, premium hardly moved.

Insurance researcher noted that there are also hidden factors influencing the market trend. Factors such as uninsured cost, catastrophe cover, claim cost inflation, volatility of equity investments, high risk, availability of capital and insurance oversupply.

Periods of market hardening were registered in 1975 and 1982 and well as 2011 following the terrorist attacks on the twin towers. Periods of market softening were registered in 1990 and 1998 where premium rates became suicidal and underwriting results overpassed investment income.

Today, it is hard to predict if we are on the edge of market hardening although we are seeing factors affecting premium increase but they are not sustainable to confirm forthcoming hardening.

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Roy Keyrouz - +961 3 869191