Is Underwriting Discipline Here For The Long Haul?
At the end of every soft market, you hear insurers and reinsurers lament their mistakes in writing coverage that was too broad, at too cheap a price. You get the equivalent of school children being sent to the blackboard to write, "I will maintain underwriting disciplineI will maintain underwriting discipline" 1,000 times.
However, up until now, the insurance industry has rarely learned its lesson. Inevitably, prices soar and coverage tightens to the point that CEOs start drooling at the prospect of gaining marketshare by stealing business from more "disciplined" competitors. So much for underwriting!
Thus, the cycle starts all over again, and like a roller coaster, insurers and reinsurers send rates plummeting, causing many in the industry to lose their lunch as the bottom falls out from under them.
As you can tell from reading this week's "World Reinsurance Report," reinsurers are once again taking the vow of discipline, swearing not to repeat the mistake of cash-flow underwriting and chasing market share.
They've never kept that vow before, and at least one leading analyst is skeptical that they can keep it now, given the historic temptation to increase marketshare by underpricing the competition just a little.
But this time, it might be different. The economic factors at work should combine to keep underwriters focused on the target, preventing a shortsighted return to marketshare growth over long-term financial health.
For one, reinsurers don't have a bull stock market to ride, so they actually have to write insurance for a living. That means they will live or die on the quality of the choices they make in underwriting–in what markets to enter, what prices to charge, what terms and conditions to offer.
For another, it's going to take reinsurers more than one, two or even three decent years to recover the losses absorbed in the soft market. They know that giving in to the temptation to cut prices or loosen terms for a short-term gain would mean continued losses at best, or insolvency at worst.
The prospect of shareholder disapproval will keep the minds of reinsurance underwriters focused on the mandate to offer reasonable coverage at sustainable prices that produces a positive bottom line.
Also, capacity entering the business–in Bermuda, for example–is unlikely to pull the rug out from under more established competitors because the new players are seeking solid, even venture capital-type returns. They are not eager to give coverage away just to grab marketshare. Thus, price and coverage discipline should not be undermined.
As a result, reinsurers are likely to remain tight-fisted for a long time to come, and rightfully so. This will force a fundamental change in thinking throughout the industry, from primary insurers to brokers to risk managers. Everyone will have to absorb more of their own exposures, pay closer attention to loss control, and sell themselves as a reliable and credible insurance risk if they hope to get decent coverage at an affordable price.
Of course, a stampede by bulls on Wall Street could always trample underwriting discipline, but as long as the bears rule, so will underwriters.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 2, 2002. Copyright 2002 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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