Market-wide fluctuations in the prevailing level of insurance and reinsurance
premiums. A soft market (i.e., a period of increased competition, depressed
premiums, and excess capacity) is followed by a hard market—a period of rising
premiums and decreased capacity. Traditionally, each period has a causative
effect on the other. For example, in a hard market, insurers' earnings are
greater than during a soft market. Large earnings have the effect of increasing
capacity. More capacity means more supply. When supply equals or exceeds
demand, premiums go down, competition heats up, and earnings begin to shrink.
Once earnings shrink to the point where the amount of capacity is reduced, the
market hardens up, and the cycle starts all over again.