Underwriting Cycle Heads South Again
Following a three-year gentle recovery from the 1990s soft market for insurance, analysts observed that prices began to decline again in 2005 and forecasted a continuation in 2006. This result is at odds with still weak underwriting results, which indicate that current prices are not adequate. Analysts believe the price decline is being driven by too much capacity chasing too little business.
Implications for p-c insurers:
For the industry as a whole, we believe the results are predictable: unacceptable underwriting results for several years, and an accelerated shakeout of some of the financially weaker or less capably managed insurers. Included in the shakeout will be recent entrants that had been attracted to the potential profits of the early 2000s, now discouraged by weakening profit margins.
Periods of hard and soft prices are a fact of life in our industry, and well-managed insurers need to be prepared to make thoughtful and conscious strategic decisions about pricing in the context of the cycle. However, insurers that establish their pricing based primarily on their competitors actions, and insurers that adjust loss reserve adequacy to soften the deterioration of reported underwriting results face a significant risk: that management itself will simply not know how (in)adequate its prices and reserves are, and therefore will lose its ability to manage the companys strategic and financial positions.
Paradoxically, while insurance is a business of averages, no one policyholder is average. Over the past several years, we have observed the development of various techniques for refining market segmentation and individual account analysis. Insurers that have developed these tools, and the discipline to use them, will gain an additional advantage in the current softening market by knowing where and by how much to cut prices to retain favorable business.
Soft commercial lines prices will lure some self-insured entities back into the commercial insurance market, at least in the short run. But for well-established self-insurance programs the return will be, at best, opportunistic and short-term.
Commissions based on premiums will decline, putting financial pressure on some agents and brokers. Also, the price differentials between different insurers will widen, making it more difficult for some agents to retain business.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 30, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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