Hartwig Tells CASRS Seminar Volatile Underwriting Cycle is Back
National News • April 7, 2005
The property/casualty industry's frequently volatile underwriting cycle is back with a vengeance and will have no mercy this time around, Robert Hartwig, senior vice president and chief economist ...
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Subject: RE: underwriting cycle
Posted On: April 8, 2005, 8:58 am CDT
Posted By: Bill Rempel
Comment:
Maybe we can't count on the investment side like we used to, because of the historically low interest rates? Look at this graph.
http://research.stlouisfed.org/fred2/series/FEDFUNDS/118/Max
I know I've said it before, but here it is again - the "cycle" is not an industry phenom, it is caused by the government's intervention in interest rates. Funny how the Fed and the fiat currency were invented to "tame the business cycle" - HAH! I think it's sad that Hartwig contrasted industry answers as to whether the cycle would ever change ("Yes or No"), and neither him, nor the industry "experts," mentioned the Fed's role in perpetrating the cycle. Not every major move in the Federal Funds Rate precipitates a cycle, but every cycle corresponds to a changing environment in the Federal Funds Rate. If you download some of Hartwig's graphs on the cycle and overlay the Federal Funds Rate graph to scale, it's plain for even an actuary to see.
Most stock companies attempt to show steady growth in revenues as this makes investors happy. They would also like to show consistent ROE, and these two goals run counter to each other, in large part thanks to the Fed's meddling. Thus during rising rates they lower prices and reduce margins, growing the book while trying to keep ROE equivalent. During falling rates, their profits disappear and they have to increase margins, they take drastic underwriting actions to "clean up the book" and try to repair the ROE while they shrink. They chase each other's tails and give the agents the perception of vacillation because the risks they chase today, are the risks they will purge with underwriting action a year or two from today, and vice versa.
Subject: RE: underwriting cycle
http://research.stlouisfed.org/fred2/series/FEDFUNDS/118/Max
I know I've said it before, but here it is again - the "cycle" is not an industry phenom, it is caused by the government's intervention in interest rates. Funny how the Fed and the fiat currency were invented to "tame the business cycle" - HAH! I think it's sad that Hartwig contrasted industry answers as to whether the cycle would ever change ("Yes or No"), and neither him, nor the industry "experts," mentioned the Fed's role in perpetrating the cycle. Not every major move in the Federal Funds Rate precipitates a cycle, but every cycle corresponds to a changing environment in the Federal Funds Rate. If you download some of Hartwig's graphs on the cycle and overlay the Federal Funds Rate graph to scale, it's plain for even an actuary to see.
Most stock companies attempt to show steady growth in revenues as this makes investors happy. They would also like to show consistent ROE, and these two goals run counter to each other, in large part thanks to the Fed's meddling. Thus during rising rates they lower prices and reduce margins, growing the book while trying to keep ROE equivalent. During falling rates, their profits disappear and they have to increase margins, they take drastic underwriting actions to "clean up the book" and try to repair the ROE while they shrink. They chase each other's tails and give the agents the perception of vacillation because the risks they chase today, are the risks they will purge with underwriting action a year or two from today, and vice versa.