The hard market, which we're hopefully exiting, had its origins in 2018. This is likely a surprise to many readers because rates didn't begin to accelerate until approximately three to four years later.
All hard markets originate with a lack of surplus. Profits, or the lack thereof, typically have nothing to do with hard markets. No matter how long, forceful, and even believable the testimonies given by insurance companies are that their lack of profits cause a hard market, don't believe them. Most people preaching this have drunk the Kool-Aid and don't know any better. They're not purposely misrepresenting the situation. They are just ignorant.
If profits were the issue, carriers would not have been profitable 31 of the last 32 years. If profits were the issue, carriers would not have made record profits the previous two years. By "record," I mean ginormous profits the last two years, and preliminary numbers suggest 2025 profits will be huge, as well. Carriers as a whole have not experienced profit problems for decades.
Hard markets are a result of inadequate surplus. The most obvious aspect of a hard market is how expensive insurance becomes. Why is this? Because there is less competition. Why is there less competition? Because some companies were mismanaged and lost their surplus. Without strong operational surplus, carriers cannot afford to grow, so they quit competing for business.
Ever wonder why carrier reps tell you about how they want to write all this and that, but everything you submit gets rejected? Sometimes it's because the submissions are not quality, but other times, especially lately, it is because a carrier does not possess adequate surplus.
The reason carriers as a whole lacked surplus in 2018 is because they forewent the largest purchase of reinsurance likely in history. This means they severely reduced the amount of reinsurance they purchased. Some carriers almost quit buying reinsurance. The effect was so pronounced that carriers overall doubled their net written premium growth rate. Their direct growth rate that year was approximately 5%, but their net growth rate was almost 11%. The only way this happens is when carriers quit buying as much reinsurance. My research into individual carriers supports this paradigm change. The overall surplus to net premiums written decreased by approximately 10% as a result.
The carriers may have explained their actions by stating that the reinsurance was too expensive. It was only too costly for them. It's like someone who has squandered their paycheck on non-essentials saying eating is too expensive. It is too expensive for them, but not for financially responsible people.
Another fascinating correlation to me was how the reinsurers thought, "If primary carriers do not want to buy reinsurance, what should we do with all our capital? Let's invest in MGAs!" In 2018, surplus lines growth was double-digit and has remained double-digit ever since; moreover, it has accounted for nearly 100% of all commercial premium growth after adjusting for inflation. This means primary carriers are, as a whole, going backward, becoming less and less important.
This explains why the MGA market has exploded. Reinsurers provided start-up capital and often the marketing rating for their initial products.
The hard market did not start immediately in 2018 for many reasons, including that a hard market takes time to get started. Then COVID hit, resulting in large premium rebates, which caused significant distortions in premium growth. Carriers had time to rebuild the surplus they lost from buying so much less reinsurance, but in 2022, they made terrible investment decisions. For unknown reasons, they decided interest rates would not increase and might even decrease. When interest rates increased, the value of their surplus dived, resulting in one of the most significant losses of surplus in insurance history. The losses had nothing to do with nuclear verdicts or catastrophic storms. It was caused entirely by bad investment decisions.
Surplus to premiums has decreased each year since. While carriers have made record profits the last two years, they have not left the money in surplus. They paid shareholders or executives, or maybe wasted it, but they did not leave enough in surplus to rebuild it. The surplus ratio at the end of 2024 was the lowest it has been likely since 2001.
This is also due to the rapid increase in rates. If a carrier has a $1 surplus to $2 premium ratio and loses 25% of its surplus (and some companies lost more than this in 2022), they now have a $0.75 surplus to $2 premium ratio. If rates increase by 10%, the ratio goes to $0.75 to $2.20. Leverage goes from 0.5 to 0.3, or in reciprocal terms, it goes from 2 to 1 to 2.2 to 0.75, an increase of 40%. That is a considerable increase and enough to cause a hard market or keep a market hard.
Another aspect of this market is that a few carriers are better managed than most. Berkshire finished 2024 with nearly 28% of all surplus in the entire industry. There were around 1,100 carriers in 2024. If Berkshire's surplus is removed, the remaining carriers' leverage increases significantly. Berkshire's surplus position skews the entire industry's results.
Progressive also skews the industry's results. If Progressive had started from scratch 24 months ago, it would already be the 10th (out of 1,100 carriers) largest by net premiums written. It is also, of the larger carriers, the most profitable on an underwriting basis. Its growth and profitability skew the industry's overall underwriting results.
Going forward, the market should soften if carriers leave profits in surplus. But the recovery will be hugely uneven because the hole many carriers have dug for themselves has only two exits: The carrier ceases to exist or they sell all or part of themselves. We've seen a lot of activity where carriers have sold off assets in the last 24 months, and simultaneously, many mutuals effectively de-mutualize so they could sell equity. Selling equity always entails selling parts of the company. Many of those companies will be sold entirely because they don't have the wherewithal to compete with the well-run carriers.
The barriers to entry are so low that in the immediate future, many tiny carriers will be created. These may be standard insurance companies, RRGs, or captives, but they will be small. Small can be beneficial for being nimble, or scary simply because they are small. The best-run larger carriers, though, will become dominant. The top 10 carriers already write more than 50% of all net premiums, and the top 90 out of 1,100 write almost 90% of all premiums. Approximately 500 carriers are unimportant and have no material future. With the barriers to entry so low on every level, financial, regulatory, and IT, I don't believe the number of carriers will decrease, but the number of important carriers will be limited. This is especially true for superfluous, small, admitted carriers because of the growth of surplus lines.
The rest of the industry will become more dependent on these larger, well-managed companies. This does not mean all the large carriers will become more important. Several are horribly run and working hard to become irrelevant. But some of the carriers ranked between 11 and 50 by net premiums are run by high-quality people, they have surplus, and they will be taking the place of the poorly run carriers, resulting in a stronger cadre of large carriers than we have today.
Whether you are an agent, a carrier, or an insurance industry vendor, it pays to know who the winners and losers will be.
