- A boom-bust cycle that has been widely observed in the insurance industry. Also known as the "underwriting cycle", the insurance cycle has two main stages, one with soft market conditions and one with hard market conditions. In soft market conditions, insurance industry profits fall because of increased competition from an overabundance of insurance companies. At some point, a period of hard market conditions overtakes the insurance market, often caused by a significant loss such as a hurricane or earthquake, which leads to an unexpected number of claims being filed. Due to decreased capital, the most financially unstable insurance companies leave the market and competition in the insurance industry decreases. Profits subsequently increase for the surviving insurance companies because of decreased competition. Seeing the high profits, new insurance companies enter the market increasing competition, thus restarting the cycle.
Related Terms and Acronyms
- Bear Market — Definition,
- When stock prices are decreasing, it's a bear market.
- Bull Market — Definition,
- When stock prices are increasing and it's a healthy market, this is known as a bull market.
- Catastrophe Hazard — Definition,
- An event, such as a hurricane or earthquake, that poses a risk of a catastrophic loss.
- Insurance (insur) — Abbreviation,
- An arrangement where one party provides financial protection to another party for specific damages or losses.
- Insurance Policy — Definition,
- A legal contract between an insurer and entity that specifies what the insurer is required to cover and any benefits the insured entity is entitled to.
- Loss — Definition,
- When expenses are larger than revenues.
- Profit — Definition,
- When revenues exceed expenses.
- Reinsurance — Definition,
- The process of one insurance company sharing liabilities from an insurance policy with another insurance company in order to lessen exposure, or in other words, insurance for insurers.
- Underwriting (UW) — Acronym, Important,
- The analysis of risk involved in making a mortgage loan to determine whether the risk is acceptable to the lender. Underwriting involves evaluating the property as outlined in the appraisal report, and also evaluating the borrower's ability and willingness to repay the loan.
- Assessing individuals for eligibility and issuing and distributing a financial product such as insurance, equity capital or credit.
- Underwriting Risk — Definition,
- The total amount of risk an entity takes on from underwriting something.