Question

Like a business cycle, insurance businesses also experience cyclical movements over time. The cyclical movements are called an "underwriting cycle" that includes periodic soft and hard markets.

Question: (1) Briefly describe the characteristics of hard and soft markets in terms of insurance price (premium) and coverage.

Question: (2) Explain on what can cause an underwriting cycle in insurance businesses.

Answer 1

ANS:

(1) In Simple terms, Hard market is a period when there is a high demand for insurance, but lower supply of coverage. Hard market is the upswing in the market cycle, when the premium increases & the capacity of insurance decreases.

Whereas, Soft market has more potential sellers than buyes. These are also termed as "Buyer's Market" as there is negotiation power in the hands of buyers.

characteristics of hard and soft markets in terms of insurance price (premium) and coverage are -

S.No.	Soft Market	Hard Market
1	Lower Insurance Premium	Higher Insurance premium
2	Broader Coverage	Narrow coverage
3	Liberal Underwriting Criteria	Stringent Underwriting criteria
4	Increased Competition	Reduced Competition
5	Increased capacity	Reduced capacity

(2) The Underwriting cycle refers to the fluctuations in the insurance business over a period of time. Underwriting cycle is also known as Insurance cycle.

Underwriting cycle represents the ups & downs in business between hard & soft market, & these flows in the hard & soft market becomes root cause of underwriting cycle.

Reduced Competition & Higher Insurance premium as represented by the Hard market looks very profitable, which further attracts the New companies or ventures to the join the market, leading to distribution of market share & increasing the completion. In response to which the existing business ventures begins to lower their rate of premium as represented by soft market in order to compete. This causes or give birth to the Insurance cycle (Underwriting cycle) to begin.