Managing the Insurance Cycle

All insurance professionals have heard of the insurance cycle, and insurance agents and brokers have been at its mercy for years.  Now, in the face of a softening market, Lloyds has begun a campaign to educate its underwriters, and others, on methods for bucking the trend.  In a report entitled Managing the Cycle (see here and here, and here for a summary), Lloyds provides a series of recommendations to its underwriters:

• Don’t follow the herd
• Invest in state of the art risk management tools
• Don’t let surplus capital dictate your underwriting
• Don’t be dazzled by higher investment returns
• Don’t rely on the big one to push prices upwards
• Redeploy capital from lines where margins are too thin
• Get smarter with underwriter and manager incentives

Great advice, and wonderful to think that everything will just settle down and renew as expiring.  But we know it won’t - successful organizations need to grow and they will drive competition.  Underwriters can never accept status quo (they are paid not to), and brokers are paid to provide advice and liquidity to the market.  So the cycle will continue, but maybe Lloyds will not be a leader for price reductions, resulting in lower market share and higher profits until the soft market heads in the other direction.

If underwriters focused on what they were good at, what they knew they could write profitably, and worked hard to get just that business, we might have different results and a more stable market.  Some insurers in the specialty lines business have been very successful with this approach.