maglog

By Terry McMullan, publisher

The insurance cycle isn’t dead after all. Experts over the past decade have predicted that technology and capital markets’ demands would eventually steer the insurance industry towards a more stable and predictable performance – and hence kill off the traditional insurance cycle.

In this edition of Insurance News, deputy editor Wendy Pugh explains what’s happening in the market right now, using the mid-term renewals as the indicator. In cycle terms, we’re getting closer to the top of the wheel, otherwise known as the soft market.

Premiums in many classes were more competitive at the mid-terms. Insurers’ profitability is recovering, and their thoughts will soon be turning to the need to be more competitive. From competition comes growth. They will be at the top of the wheel. Capacity will be abundant, rates will be good, claims manageable, and it’s time to go out and get some more business.

Brokers’ desperation and frustration of the past few years are apparently behind us as if they never existed.

We’re getting closer to the point of the cycle where insurers will start chasing market share. That’s followed by rates going into freefall. This is the point where losses from a large catastrophe hurt and remedial action begins. Welcome to the hard market.

Capacity gets tighter, followed by rejection of non-vanilla risks, before rates really start ratcheting up. By this time you’re a third of the way up the wheel again, and years of your working life have passed.

So, are we seeing the first signs of what seems – under the laws of the legendary cycle – to be an inevitable race back to the bottom? Not according to the insurers.

They say they now have their technical rates where they should be after five or more years of increasingly painful premium rises. The big players in property and personal lines are adamant they’ll be holding the line against premiums below the technical rate, even as competition heats up.

But the Australian industry didn’t get its reputation as the world’s most competitive insurance market for nothing. Every insurance company, general or specialty, already knows where it wants to grow its market; and the best way to grow is to offer brokers better terms and a premium that’s a bit better than the others.

The heating of the overall market may take a fair while. The period between where we are now and where insurers arrive at the conclusion that they’re losing money is a full 48 degrees of the cycle.

So tracking the industry’s actual progress through the cycle in real time isn’t an exact science. It seemed a long journey down to what we hope was the bottom of the cycle.

It’s not easy to generalise about insurance companies, but the cycle is still with us, despite technology’s contribution to our efficiency and the ease of global networks. So taken as a generalised group, insurers are at the end of the premium-raising phase of the cycle, where profitability has been restored, investments are performing and the hunger for growth has returned after a long hiatus.

Generally we can expect the worst is over for five or six  years, although really, who knows? Terms should loosen up gradually, premiums more slowly.

Investment income may have something to do with that. “More discipline” has been the pledge from CEOs at this stage of the three insurance cycles I’ve reported on, but in the past the reins always got a bit looser as the money rolled in.

This time around competitive rates and a broader risk appetite may well be dampened by boards of directors who now measure their top executives’ performance on their ability to maintain and balance profitability and growth.

Large companies have large investors, and those investors want stable, predictable returns.

Insurers’ appetite for difficult risks like flood, cyclone and bushfire is therefore likely to be more constrained than some might hope. Insurers I’ve spoken to have commented on the need to adhere to the technical rate and not move outside underwriting guidelines.

This drive for a more stable financial performance from insurers is reflected in the giant reinsurance programs recently adopted by IAG and Suncorp. They were expensive, but they all but guarantee a smoother financial performance in an increasingly risky environment.

Wendy’s article highlights the rise of greater levels of capacity and – just as important – more competition. The all-too-recent steep decline in insurers’ risk appetites steered many brokers towards the underwriting agencies, which have become an increasingly attractive option. Lloyd’s increased investment in Australia appears to have been a major catalyst for more competitive behaviour.

Expect the pace of mergers and acquisitions among underwriting agencies to accelerate over the next few years, much as has happened with the broking sector.

For brokers, commissions will drop in line with any fall in premiums, but probably not as much as they experienced in previous moves to a soft market – and terms will be a strong negotiating point.

As I said, the insurance cycle is not an exact science, and it probably shouldn’t keep being a roughly accurate prediction of what comes next.

The next five or so years will tell.