First things first: how exactly does insurance work?

To understand what a hard market is, it’s crucial to have a general grasp of how insurance works. Here’s a quick refresher: insurance is designed as a way to transfer financial risk away from individuals into a community risk pool. In an ideal world, everyone contributes to the pool by paying a monthly fee to cover the potential loss of millions of dollars. When there’s a claim, the insurance company uses this collective pool, in addition to other investment income (from stocks, bonds, and assets) to pay for the loss.

So what’s a hard market?

The insurance market is cyclical and much like a pendulum, it oscillates between soft and hard markets every few years. When the economy is good, insurance companies have a greater capacity to take on risks, coverage is widely available and there’s greater competition between different carriers. That means insurers are more willing to relax their underwriting criteria and offer attractive policy terms to grow their business. For consumers, that leads to lower premiums, flexible contracts, and more options to choose from; this is known as a soft market.

Sounds like a win-win situation, right? But not for long. These conditions are ultimately unsustainable. Remember the community risk pool? Well, what happens when everyone is making claims? And what if all those claims are all worth millions of dollars? The risk pool can no longer afford to sustain that kind of a loss.

As claims rise in frequency and in cost, the market starts to harden because insurance companies are paying out more than they can get back in premiums and investments. To protect their existing clients and ensure they’re financially secure enough to pay claims, insurers have to toughen up underwriting rules, restrict coverage, and raise premiums. There’s a high demand for insurance, but less coverage to go around.

The cycle softens over time as insurers’ high rates and selectivity restabilize the risk pool and balance out the premiums collected against the claims paid out.

What causes a hard market?

There are various factors that contribute to a hard market—fluctuating market trends, ongoing rate reductions, economic conditions, and more. One of the biggest reasons? When claims go up. More claims means more payouts and higher insurance premiums. Why are claims on the rise? Some of the most common reasons right now include:

So what does a hard market mean for me?

Generally speaking, consumers can expect:

What does the future look like?

After a few tough years, the Canadian insurance industry as a whole is operating at a loss across all lines of insurance. With billions of dollars in claims far outpacing premiums, the industry was experiencing a hard market in 2019 and into the first quarter of 2020.

And then COVID-19 hit. The true impact of COVID-19 is yet to be seen and the rapidly changing nature of the pandemic ultimately makes market changes difficult to predict. Still, the continued effect of global uncertainty and the shutdown of the economy are likely to prolong hard market conditions well into 2021, longer than initially anticipated. With lower economic activity and stay-at-home measures in effect, auto accidents are down. But according to Intact, pricing relief offered to Canadians facing financial difficulty may even have the boomerang effect of increasing rates for the rest of the year.

The good news? The insurance industry is strong and well-positioned to deliver. It’s impossible to know how long the current phase of the cycle will last, but insurance companies and brokers are doing everything they can to serve their clients and ensure everyone is adequately protected.

What can I do about it?

The hard market is here to stay for the foreseeable future. While you’ll likely need to be prepared for some rate increases, there are several practical steps you can take to trim down your costs in the meantime: