Lloyd’s Publishes Advice on ‘Managing the Cycle’

December 7, 2006

Lloyd’s has released a new report, Managing the Insurance Cycle, which warns that “considerable uncertainty remains over prices and conditions in the commercial insurance market following last year’s record hurricane season.” Among other suggestions, it warns underwriters to beware of “following the herd,” and urges them to adopt and implement “risk management tools.”

As most industry professionals know, the “cycle” describes the “peaks and troughs that reflect the rise and fall of insurance prices.” It alternates, “between periods of soft market conditions, when premium rates are stable or falling and insurance is readily available, and periods of hard market conditions, when rates rise, coverage becomes difficult to find, and insurers’ profits increase,” according to Lloyd’s. “As the market softens to the point that profits diminish or vanish completely, the capital needed to underwrite new business is depleted, and insurers who have not underwritten prudently can lose millions.”

Lloyd’s report singles out “seven key steps for ensuring that the industry becomes less unpredictable and underwrites on a sustainable basis for the benefit of both policyholders and insurers.” It sets them as follows:
— Don’t follow the herd.
— Invest in the latest risk management tools.
— Don’t let surplus capital dictate your underwriting.
— Don’t be dazzled by higher investment returns.
— Don’t rely on ‘the big one’ to push prices upwards.
— Redeploy capital from lines where margins are unsustainable.
— Get smarter with underwriter and manager incentives.

Rolf Tolle, Lloyd’s Director, Franchise Performance, commented: “In the past, insurers have simply accepted the insurance cycle, seeing it as a force of nature with an uncontrollable impact on their business. But at Lloyd’s we believe that insurers now have the information and the tools they need to manage the cycle much more effectively.

“Market conditions are changing – with rates softening in a number of lines – and we believe that it is now more important than ever for insurers to take action. We have already done a lot of work on this at Lloyd’s to encourage underwriters to manage the cycle, but the real test of a soft market is still ahead of us and there remains much to be done.”

Lloyd’s commissioned the report from the Economist Intelligence Unit as part of its 360 Risk Project, which aims to generate debate about today’s key risk issues and how best to manage them.

The full report, including an executive summary, can be obtained at: www.lloyds.com/360.

Source: Lloyd’s

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