User:Kirbybuddy/Soft market

'Soft Market'

First off, let us define 'Soft Market.' A soft market is a market that has more potential sellers than buyers. A soft market can describe an entire industry, such as the retail market, or a specific asset, such as lumber. Low prices result from this excess of supply over demand. This is often referred to as a buyer's market, as the purchasers hold much of the power in negotiations. A more simplified definition of a soft market is a buyer's market in which supply exceeds demand, causing little trading activity and wide bid-ask spreads. As a result, a large sell order can easily push the price of the stock or the market down. If investors move in to buy at this lower level, the market is sometimes said to be firming up. Another way to describe a soft market is as one with more supply than demand.

Market Conditions of Market Management Techniques

"Hard" or "soft" market conditions can influence the selection of the risk management techniques used to treat loss exposures. During a period of hard market conditions, profitability is declining, or the industry in experiencing underwriting losses. As a result, underwriting standards tighten, premiums increase, and insurance becomes expensive and more difficult to obtain. Because of unfavorable market conditions, a risk manager may decide to retain more of a given loss exposure and cut back on the amount of insurance purchased.

Now for the opposite of a hard market, in contrast, in a soft market, profitability is improving, underwriting standards loosen, premiums decline, and insurance is easier to obtain. Insurance may be viewed as relatively inexpensive. Because of favorable market conditions a risk manager may decide to retain less of a given loss exposure and increase the amount of insurance purchased.

To relate a soft market to real life insurance, property and liability insurance markets fluctuate between periods loose underlying standards, and low premiums.

Characteristics of a Soft Market

Here are the characteristics of a soft market in the insurance industry.

These characteristics include:

• Lower the insurance premiums
• Broader coverage
• Reduced the underwriting criteria, which this means that the underwriting becomes easier to obtain
• A visible increased the capacity, which means that the insurance carriers write more policies and then higher limits occur
• A noticeable increased competition among insurance carriers

Ultimately these rate reductions associated with a soft market affect the insurance carriers’ bottom line, as a carrier relies on a combination of insurance premiums and investments to make money as a company.

Soft Market Example that can be Applied to Real Life

A soft market can lead to rapid drops in everyday prices as sellers compete to find hungry buyers. Prices will fall as the excess of supply over demand increases. Here is an example to help demonstrate this risk management concept. For example, assume that twenty houses are put up for sale and there are fifteen buyers that are interested in a home. There are five left over houses that will not be sold to a buyer, assuming that each buyer is only buying one house. Because there are limited buyers, this scenario forces the sellers to compete on the price of a house in order to raise the attractiveness to the potential buyer. As a result, this type of housing market would be called a soft market.

References

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<"Soft Market Definition | Investopedia." Investopedia. N.p., n.d. Web. 04 Dec. 2014. />

<"Soft Market." TheFreeDictionary.com. N.p., n.d. Web. 04 Dec. 2014. />

<"Soft Market." What Is Soft Market? Definition and Meaning. N.p., n.d. Web. 04 Dec. 2014. />

<Rejda, George; McNamara, Michael (2014). Principle of Risk Management and Insurance (12th ed.). Upper Saddle River, NJ: Pearson Education, Inc. />