Whatever happened to the underwriting cycle?

Back in the 80s and 90s, there was one constant: the underwriting cycle. Indeed, one could be forgiven for thinking that there was only one topic of conversation back then. Not the weather, but where the re/insurance industry was in the cycle. Hard or soft? Hardening, softening, or a curate’s egg (soft in places)?

The market, the ratings agencies, conferences and re/insurance publications appeared to be obsessed with the current status of the underwriting cycle, and where the market stood at that moment. Was the cycle on the way up or on the way down? What would turn the market? At meetings such as the Reinsurance Rendezvous in Monte Carlo, or later in Baden Baden, the position of the cycle was on everyone’s lips.

The reason was perhaps that it was such a fragile market, in the sense that the market turned when a sort of mild hysteria set in. No one wanted to be the first to raise rates, but once it started, everyone poured in and the market turned en masse. The cycle was simple in many ways, but the reaction, and predicting when it would turn, was never easy.

The cycle was driven by a number of factors, not least the reinsurance market and the impact of major catastrophes. After a major catastrophe, or a string of liability claims (such as asbestosis or pollution), reinsurance capacity would contract as reinsurers pulled out, resulting in higher premium rates. These in turn affected the insurance industry, which would be forced to increase rates, and a hard market would emerge.

In time, capacity would come back into the market as new players arrived and a lack of catastrophes and other losses would tempt underwriters to compete on price, ultimately resulting in a soft market.

The whole cycle was exacerbated by the fact that insurers and reinsurers would often subsidise their underwriting with investment income. In other words, an insurer might make underwriting losses year in and year out (and often did), but the premium gained earned investment income, which more than made up for the underwriting loss.

So catastrophes were fundamental to the underwriting cycle. For example, a hard market dominated the late 1980s and early 1990s as the market was hit by major losses such as Hurricane Hugo in 1989, the European windstorms in 1990, Hurricane Andrew in 1992 and the Northridge earthquake in 1994. But then capital came back into the markets, tempted by high rates, and the late 1990s saw a soft market develop.

But much of the 21st century has seen a prolonged soft market unprecedented in its length, despite massive losses such as 9/11, Katrina, and a whole string of other expensive natural disasters. Which now begs the question – is the cycle dead?

The simple answer is yes. But maybe not dead and buried.
There are a number of factors behind the prolonged soft market. Firstly, capacity at the reinsurance level is abundant, partly as a result of capital markets recognising the potential of the reinsurance market. Non-traditional capital has flooded into the reinsurance market, and despite major losses, continues to do so.

Last year, many believed the string of cat losses would see this non-traditional capital flee the market but, in fact, capacity in the market recovered remarkably quickly. Investors were not put off; in fact, interest has remained high. There was a slight impact on rates but as ratings agencies quickly pointed out, these 1 January 2018 increases were not sustainable and by April renewals, the increases were disappearing.

The last few years have seen commentators regularly repeating the message that rates were rock bottom and there was nowhere to go but up. But still the market as a whole did not turn (as it used to). US cat-affected business saw some increases but that was largely it. The industry has grown so used to the soft market that a slowdown in the softening would be greeted as a positive for the industry in the way that an actual market turn would have been welcome in previous decades.

This is not to say that rates have not fluctuated in certain lines. But perhaps that is the point. The underwriting cycle now applies to individual lines, regions, or even individual accounts. But the days of an overall market turn appear to be over. Which is, of course, great news for corporate buyers of insurance. And, in some ways, it is good news for the insurance industry too. The volatility of the cycle was not good for anyone. Planning ahead became impossible, and the lack of stability was a major problem for corporates (and a huge driver for the establishment of captives).

It used to be a concern to some in the sector that there were youngsters who had never seen a hard market, or did not understand the vagaries of the underwriting cycle. How would they cope? Well, it appears that may not be much of a problem anymore. Some of us older folk remember it all too well, and few will mourn its demise. If indeed, it is truly dead. Remember all those once-in-a-lifetime storms? It is getting hard to keep count. Never say never.