The first half of this year has already made 2011 the most costly on record for the Insurance industry – natural catastrophe losses are already expected to reach $50bn and Lloyd's of London is publishing £2.3bn impact from earthquakes and floods so far and the Atlantic hurricane season is beginning. The industry has been very fortunate for the past couple of years, with many hurricanes not making US landfall meaning losses have been limited and could be covered by earnings, rather than impacting capital, but there is concern that this trend will not continue and another major disaster this year might cause companies to go under.
Recently, a leading London Market Insurer published a half-year, pre-tax loss of £85.6m, compared with a profit of £97.2m a year ago
Lloyds of London and several large Insurers are warning now that rates should rise across the industry to ensure that companies are recouping losses and will not be over exposed to claims should this year continue on its current trajectory.
Increasing rates and moving towards a “Hard” Market is necessary and when the increase arrives, insurers will start to see a sharp increase in top line revenue growth until competitive market pressures start to soften the market and drive rates down again.
This cyclicality in the industry has been occurring for many years and is broadly accepted, but rate swings can be quite profound and to observers outside the industry it appears that revenues take large jumps at a point in time and then erode until the next jump, with the intervening time period being essentially random. Using a major insured loss as an excuse to raise prices in unrelated lines of business is a practice being highlighted by Regulators, rating agencies, and analysts – not to mention insurance buyers – and resistance is increasing.
While it is true that the frequency and impact of catastrophes is outside human control and the market cycle cannot be eradicated, the way insurers respond to the cycle is within their control. In more recent years, the volatility of the market has been dampened through more effective hedging strategies and increased capitalisation and oversight, more could still be done. However, this would require Companies to step up, change their approach and be prepared to make tough decisions:
• Insurers need to be prepared to walk away from markets when prices fall below that which is acceptable for their own business strategy – do not chase business for the sake of top-line revenue and redeploy capital if margins have eroded to the point where the business is no longer viable
• Do not be distracted by investment returns or available capital. Higher investment income or a surplus of capital could lead to unsustainable or overly risky decisions. Disciplined underwriting procedures must be maintained and Asset Management activities should be segregated from the Insurance business and monitored separately
• Push for continuous improvement of risk modelling and management tools based on the latest science and actively considering issues such as climate change. Additionally, insurers can embrace the current, more informed nature of their clients and utilise these tools in effectively communicating pricing and coverage decisions
• Take a fresh look at underwriter and portfolio manager incentives. Can these incentives be linked to a more balanced scorecard based on bottom line underwriting results, shareholder value and effective decision making, rather than revenue growth
No single insurer can affect the overall market cycle or supply and demand conditions. There will always be competition over a relatively static customer pool, but companies can, and should be prepared to strengthen their resolve, maintain discipline and ensure that they are prepared to leave business alone if it is not right for their risk, price and margin profile. He who dares to buck the trend could benefit in the longer term
Baringa Partners works in partnership with its general insurance, life and pensions and London Market clients to consolidate and grow their place in the market through our in-depth insurance industry knowledge and delivery capabilities. If Baringa Partners could help your business, contact Neil Surman: neil.surman@baringa.com
Guardian.co.uk – 1st August 2011 – Earthquakes and political tremors make this year insurers' most expensive ever
Guardian.co.uk – 17th May 2011 – Lloyd's of London warns insurers to raise premiums or risk collapse
FT.com – 1st August 2011 – Hiscox suffers from ‘costliest year ever’
Post by Neil Surman on the 9th of August 2011
