Invisible Hard Market

An invisible hard market refers to rising prices for property and casualty insurance that fails to result in higher profits for insurers.

Under normal circumstances, limited supply for insurance results in more underwriting income for insurers, as well as more net profit. In an invisible hard market, the net profit either doesn’t budge or declines, largely due to weak demand or abnormal market conditions.

Invisible hard market first became a term when former MMC President and CEO Brian Duperreault, who became CEO of AIG in 2017, coined the phase in 2009. The longtime industry veteran used it to describe the insurance market in the aftermath of the Great Recession, in which the supply of insurance decreased, as some insurance companies declared bankruptcy, and others consolidated and became part of larger firms.

Normally, consolidation results in higher prices, which coincides with a so-called market hardening. This indeed was the case in some market niches. However, overall lackluster demand for insurance during the Great Recession negated the effect of these higher prices, resulting in disappointing insurance income for companies.

Invisible hard market shouldn’t be confused with Adam Smith’s invisible hand, which describes how the self interests of individuals drives the economy and promotes the well-being of societies.

Invisible hard market seemingly is contradictory to invisible hand, as it fails to leverage the two most critical facets of Smith’s invisible hand definition. In his foundational work, An Inquiry into the Nature and Causes of the Wealth of Nations, Smith describes how voluntary trades in a free market produce unintentional and widespread benefits. Second, these benefits are greater than those of a regulated, planned economy.

Neither of these tenets hold true in an invisible hard market. To the contrary, an invisible hard market for insurance points to market inefficiency, at least in the short term. An invisible hard market does not benefit the bottom line of insurance companies, and also fails to help consumers, who must pay higher insurance rates.

In modern interpretations of Smith’s theory, however, short-term market inefficiencies such as the invisible hard market tend to straighten out in the long term. As a result, Smith’s invisible hand seemingly cures the invisible hard market for insurance over time.

In addition, some argue the term invisible hard market still is in line with Smith’s definition, in that Smith’s invisible hand relies on market free of government intervention.

Government intervention played a large role in the Great Recession. Leading up to the crisis, policies that promoted homeownership for individuals who couldn’t afford it bloated home values and led to asset bubbles. Once these bubbles burst, government intervened in an unprecedented way, by borrowing trillions and bailing out the private sector, neither of which fits Smith’s free market definition.