Anyone who wants to buy insurance wisely needs to be familiar with the phrases “soft market” and “hard market.” The insurance market—like housing markets, energy markets and most others—follows a cyclical pattern of expansion and contraction. The periods of expansion, called “soft markets,” are characterized by:

• steady or lower rates and premiums,
• easier underwriting standards, and
• more aggressive competition among insurance companies for business and market share.

On the other end of the cycle, the periods of contraction—called “hard markets”—are characterized by:

• rising rates and premiums,
• stricter underwriting standards, and
• less competition among insurance companies, including some companies exiting certain markets altogether.

On average, a complete soft/hard cycle lasts between seven and ten years, with each part lasting about three years. (Some recent evidence suggests that these averages are trending longer.) So, the best time to shop for new or improved insurance coverage is during a soft market. And, during a hard market, you should make sure to keep whatever insurance you have in place—because if you need new or replacement coverage, it’s likely to cost more and provide less.

What factors influence turns in this soft/hard cycle? That’s hard to say. Some insurance professionals think their market follows the general economy, especially interest rates; but others think the insurance market is actually a leading indicator of where the general economy is heading. One thing experts agree on: the combination of low interest rates (which hurts insurance companies’ investment income) and slow growth encourages hard-market conditions. Changes in laws or regulations can have an effect, too.

Earlier this year, the big insurance broker Marsh released a projection for insurance market conditions in 2012. While the firm’s actuarial brains say that market conditions for the year will come up a little short of their definition of a “hard” market, they think rates will be going up.

According to David Bidmead, Marsh’s head of U.S. operations:

“Carriers are expected to be extremely disciplined in their underwriting and seek rate increases where they can. Those insureds that are able to provide carriers with complete, accurate, and quality data will be best positioned to navigate a changing insurance market and effectively differentiate themselves from others seeking critical capacity for catastrophe risks.”

“Extremely disciplined underwriting” is not generally a good thing for insurance consumers. It means lots of applicants will be turned down for the best policies. And, even if they qualify for coverage, the cost will be steep. Insurance companies have been preparing for stricter underwriting because they expect the Affordable Care Act to be either overturned by courts or repealed by Congress. And that will likely mean a flood of Americans looking for individual health insurance.

Why? In many cases, employers and employer groups have already made plans to drop health coverage for their employees as the ACA takes effect; if the law is overturned, those employers/groups will have to either:

• pay higher premiums for a shrinking level of health coverage, or
• drop health insurance as a benefit.

Even if some choose the first option, enough will choose the second that many employees will be turned loose into the market for individual health insurance policies. This move should not come as a complete surprise. The market for individual health insurance policies has been growing modestly for several years; in fact, its growth is one of the reasons that the experts at Marsh and other brokerages say the current insurance market doesn’t quite qualify as “hard.” This modest growth usually fuels the kind of competition that drives prices down. Like most sellers of goods or services, insurance companies like growth—as long as it’s steady and predictable. The flood of consumers into the individual policy market might be overwhelming, though, which could push rates and premiums up.

So, if you’re turned loose in the individual health policy marketplace, what will “disciplined underwriting” mean for you?

Health insurance underwriting metrics are the same for group and individual policies—they’re just more severe for individual policies, because there’s no risk pool to share the cost of claims. So, expect a lot of questions about your health—present and past—as well detailed lifestyle questions. And get ready for blood tests, height and weight confirmation and other para-medical examinations before you get coverage. If you smoke or drink heavily, or if you’re overweight, expect to pay a lot more than sober, non-smoking, thin people pay. Age also plays a major role in health underwriting. Since health policies tend to renew on an annual basis, you can’t usually lock in a set premium for 10 years or more, as you can with life insurance. (This may change in the next few years.) Instead, look for a policy that’s “guaranteed renewable”—this is as close to a locked-in rate as the health market currently offers. If you can find a policy that guarantees renewal, make sure you keep for as long as possible. Particularly if the insurance market remains in a hard phase for the next few years.

As we’ve noted before, one of the best ways to save money on health insurance is to look for a high-deductible policy combined with some form of tax-advantaged savings account. The ACA limits some of the cost-saving features of the most common high-deductible policy-plus-Health Savings Account packages. But, if the law and its HSA limits are overturned, expect those packages to become popular again.

There are several other administrative and regulatory steps that will help make individual health policies more affordable. The most commonly-cited of these steps include:

• Allow individuals to claim the same tax deductions that employers and employer groups claim currently for health insurance expenses.
• Allow individuals (and, for that matter all consumers) buy health insurance policies across state lines, creating more competition.
• Loosen the rules allowing small groups (such as trade/professional associations, religious or social organizations, etc.) to establish purchasing groups or risk pools for their members.
• Create liability limits for medical malpractice and other health-care related liabilities—and make sure that those lower costs are reflected in relevant health insurance rates and premiums.

If some or all of these changes are made, a hard (or not-quite-hard) health insurance market might soften a bit. Whatever the future of the Affordable Care Act, the trend in the health insurance markets seems to be a movement toward more individual policies. In the long run, this could mean a more efficient system of allocating health care costs; in the short run, it may mean some market uncertainty and higher premiums. This is especially true if a repeal of the ACA coincides with a move to the hard end of the insurance market cycle.