Insurance is cyclical in nature, meaning that there are hard markets and there are soft markets. Insurance companies must make a profit, and hopefully earn investment income off of the premiums received. There may be years where there are fewer losses than other years, but companies must make enough money to not only cover the losses in the current year, but have enough money set aside in reserve to cover future losses. They use actuarial methods to try and predict future losses based on past experience but that does not always hold true. And in recent years, there have been a number of unprecedented catastrophic losses that have negatively affected the capital held in reserve by insurers and reinsurers. Thus, for many lines of business, we are currently in a hard market.

A hard market may also be referred to as market tightening. This is because the availability for insurance, usually a particular type of insurance, becomes more difficult to obtain and often may be more expensive. This typically happens in the commercial property and casualty markets, as a result of catastrophic losses,  large jury verdicts, or other factors affecting the profitability of insurers and reinsurers. 

In simple terms, the insurance industry takes in premiums to pay losses. A certain portion of their premiums typically go to reinsurers  to offset catastrophic losses or to free up capital, and another portion  gets set aside in reserve funds. Insurers invest the premiums they take in to make money off the investments. The amount set aside in reserve is determined by actuarial calculations that take into account previous loss history and earnings and actuaries use this to make predictions about losses and the rates necessary for the company to maintain a profit. The actuarial predictions are not just for the current year but usually for five or maybe even ten years out. If the insurer doesn't set aside enough funds in reserve, they get downgraded as to their financial stability by rating agencies such as A.M. Best and Standard & Poors. Therefore, it is important that insurers take in enough premium to not only cover the losses that happen in the current year, but also to have enough in reserve to cover unexpected catastrophic losses that were not accounted for in the actuarial predictions.