Managing the Cycle

Much has been written in the insurance press lately about the cyclical nature of the insurance industry. Now the market is hard, or hardening. For most of the 1990s stock markets boomed, the insurance market softened and the need to underwrite for a profit waned. Before that, in the ’80s, the lackluster stock market led the way to the hard insurance market and tight underwriting. Now, in the early years of the 2000s we’re back once again to “old-fashioned” underwriting. Up, down, around and around.

Is there a way to beat the manic/depressive quality of the cycle? Is it necessary to do so? Julian James, director of Worldwide Markets for Lloyd’s of London, thinks so. As IJ staff writer Cynthia Beisiegel reported from the National Association of Independent Insurers annual convention, in a keynote speech James invited insurers to change their perception of the market and free themselves from the tyranny of the market cycle. (“Lloyd’s Leads the Way to Profitable Industry,” www.insurancejournal.com, Oct. 29, 2002.)

“Hoping that a couple of more years of the hard market will be our salvation is about effective as a man lost in the desert, trusting a mirage,” James said. “We need a new response. And that response needs to be to challenge the very notion of the insurance cycle itself. We do that by sticking to one very important principle—make a sustainable underwriting profit year upon year.”

Articles featured in this issue of Insurance Journal covering professional liability and directors and officers lines of insurance illustrate James’ point. Currently both of those lines are experiencing limited capacity and soaring prices. They are both coming out of soft cycles in which it can be argued that “cash flow” underwriting was the norm. Pricing was low and coverage plentiful. Now, professionals who must purchase such protection are facing enormous price hikes for much less coverage than they were buying previously. Certainly a natural ebb and flow is to be expected in economic markets, but must extremes be the norm?

James’ assertion that the cycle is managing the insurance industry rather than the other way around, deserves attention. According to a statement released by Lloyd’s, he suggested that insurers can defy the preconception that cyclical rising and falling insurance prices are a given and create a more stable operating environment where a consistent, reasonable profit can be made. To do that under present conditions, James noted, insurers would have to aim for a sustained combined ratio—a measure of premium income against claims and expenses—of 90 percent.

According to James, Lloyd’s is leading the way with that initiative. “Lloyd’s is setting out to challenge the cycle,” said James. “We want to drive the bus rather than sitting in the backseat being driven down the freeway out of control at 100 miles an hour.”

It will be interesting to see if Lloyd’s takes the rest of the industry along on that ride.