Soft Markets: Benefit no One

When insurance prices are soft, everyone's watching the bottom line at the expense of service and product development.

By CYRIL TUOHY, managing editor of Risk & Insurance®

The market's gone soft, and apparently has every intention of staying that way for the near future. I don't like it, not one bit. There's little to be thankful for in this soft market, except maybe for a buyer here and there who benefits, and does so only in the short term.

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Soft markets, you see, tend to put a damper on innovation. There's little appetite on the part of carriers to develop new products, and on the part of brokers to develop new distribution channels.

All anyone talks about in a soft market is the bottom line--dollars and cents, and the obsession with market share. All anyone talks about in a soft market is rate of return--to shareholders, of course.

What about rates of return for the greater good of the industry instead of for faceless institutional shareholders? What about returns to the loyal insurance buyers in this and in future generations?

Within the bowels of the carriers, soft markets cast a pall on the important questions: Should we continue using brokers or go direct? What kinds of products and services do our buyers need to help them get through today and tomorrow? How is the foreign competition stacking up? Need we migrate from the mainframe to the cloud? Where are we at with content management software compliance?

In a soft market those questions are all but forgotten, in the name of the almighty buck. Cost control is all the rage in a soft market.

Buyers, too, tend to focus too much on price during soft markets instead of on service and on long-term relationships. Like teenagers at the mall on Black Friday, the buy side's obsessed with piling in and getting the best deal for themselves.

What of pausing to think about the quality of the transaction? The details of the coverage? The ability to pay the claim? In a soft market, it all falls by the wayside.

It's true that soft markets give buyers a bit of price break. But the break is never that much, nor do the price cuts last all that long. It's just a matter of time before rates harden again, carving out yet another zigzag in the interminable insurance cycle.

In the end, soft markets benefit no one. Soft markets only force the insurance industry to put off until tomorrow what industry leaders should be facing today.

(Read Senior Editor Dan Reynold's Point "Soft Markets: May They Last.")

August 1, 2010

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