Hard market / Soft market

In the fourth quarter of 2021 the Marsh pricing index showed US cyber premiums up 130% year over year. That is a hard market at its most brutal: premiums sharply up, capacity contracting, exclusions multiplying, deductibles rising, sub-limits coming down, applications getting tougher. Hardening usually follows a claims shock that has eaten capital, a major catastrophe such as Hurricane Andrew in 1992 or September 11, 2001, a ransomware wave, several loss-making years, or the recognition that earlier years were underpriced and damaged balance sheets. Lloyd's said so plainly in 2018, requiring every syndicate to produce a remediation or exit plan for its worst-performing 10% of business. A soft market is the reverse movement. Fresh capacity arrives, drawn by profitability, competition sharpens, underwriting results hold up, and premiums fall while terms loosen, wordings broaden from one renewal to the next and sub-limits rise again. The buyer gains in the short run. For the insurer, the risk is underpricing that sets in as underwriting discipline slackens, and it only shows several years later, as claims develop. Carriers follow the lead more than they admit. Cyber went through the full cycle in five years. A soft market until 2019, then the ransomware years of 2020 to 2022 and increases of 50 to 200% depending on the segment. The exit from a hard market is seldom abrupt: fresh capital arrives quickly, but underwriters who have seen the losses hold on to their requirements for a while. From the second half of 2023, new capacity and better results sent rates down again, without a return to pre-2020 wording on exclusions, and the security conditions imposed in 2021 stayed in place. For an investor, the phase of the cycle weighs heavily on carriers' returns, and retentions, rate on line and terms say more about it than renewal press releases do.