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Insurance Cycle is a term describing the tendency of the insurance industry to swing between profitable and unprofitable periods over time is commonly known as the underwriting or insurance cycle.
The underwriting cycle is the tendency of property and casualty insurance premiums, profits, and availability of coverage to rise and fall with some regularity over time. A cycle begins when insurers tighten their underwriting standards and sharply raise premiums after a period of severe underwriting losses or negative stocks to capital (e.g., investment losses). Stricter standards and higher premium rates lead to an increase in profits and accumulation of capital. The increase in underwriting capacity increases competition, which in turn drives premium rates down and relaxes underwriting standards, thereby causing underwriting losses and setting the stage for the cycle to begin again. [1] For example, Lloyd's Franchise Performance Director Rolf Tolle stated in 2007 that "mitigating the insurance cycle was the "biggest challenge" facing managing agents in the next few years". [2]
All industries experience cycles of growth and decline, 'boom and bust'. These cycles are particularly important in the insurance and reinsurance industry as they are especially unpredictable.
Lloyd's of London research in 2006 revealed, for the second year running, that Lloyd's underwriters see managing the insurance cycle as the top challenge for the insurance industry, and nearly two-thirds believe that the industry at large is not doing enough to respond to the challenge. [3]
The Insurance Cycle affects all areas of insurance except life insurance, where there is enough data and a large base of similar risks (i.e., people) to accurately predict claims, and therefore minimise the risk that the cycle poses to business.
The insurance cycle is a phenomenon that has been understood since at least the 1920s. Since then it has been considered an insurance 'fact of life'. Most commentators believe that underwriting cycles are inevitable, primarily "because the uncertainty inherent in matching insurance prices to [future] losses creates an environment in which the motivations, ambitions, and fears of a complex cast of characters can play out." [4] Lloyd's counters that this has become "a self-fulfilling prophecy". [5]
More recently, insurers have attempted to model the cycle and base their policy pricing and risk exposure accordingly.
For the sake of argument [6] let's start from a 'soft' period in the cycle, that is a period in which premiums are low, capital base is high and competition is high. Premiums continue to fall as naive insurers offer cover at unrealistic rates, and established businesses are forced to compete or risk losing business in the long term.
The next stage is precipitated by a catastrophe or similar significant loss, for example Hurricane Andrew or the attacks on the World Trade Center. The graph below shows the effect that these two events had on insurance premiums.
After a major claims burst, less stable companies are driven out of the market which decreases competition. In addition to this, large claims have left even larger companies with less capital. Therefore, premiums rise rapidly. The market hardens, and underwriters are less likely to take on risks.
In turn, this lack of competition and high rates looks suddenly very profitable, and more companies join the market whilst existing business begin to lower rates to compete. This causes a market saturation and Insurance Cycle begins again.
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to protect against the risk of a contingent or uncertain loss.
Lloyd's of London, generally known simply as Lloyd's, is an insurance and reinsurance market located in London, United Kingdom. Unlike most of its competitors in the industry, it is not an insurance company; rather, Lloyd's is a corporate body governed by the Lloyd's Act 1871 and subsequent Acts of Parliament. It operates as a partially-mutualised marketplace within which multiple financial backers, grouped in syndicates, come together to pool and spread risk. These underwriters, or "members", are a collection of both corporations and private individuals, the latter being traditionally known as "Names".
Reinsurance is insurance that an insurance company purchases from another insurance company to insulate itself from the risk of a major claims event. With reinsurance, the company passes on ("cedes") some part of its own insurance liabilities to the other insurance company. The company that purchases the reinsurance policy is referred to as the "ceding company" or "cedent". The company issuing the reinsurance policy is referred to as the "reinsurer". In the classic case, reinsurance allows insurance companies to remain solvent after major claims events, such as major disasters like hurricanes or wildfires. In addition to its basic role in risk management, reinsurance is sometimes used to reduce the ceding company's capital requirements, or for tax mitigation or other purposes.
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Tokio Marine HCC is an international specialty insurance group with offices across the United States, the United Kingdom, Spain, and Ireland. The company is based in Houston, Texas, U.S.A. but has major offices in Atlanta, Barcelona, Boston, Chicago, Dallas, Detroit, Farmington (CT), Frederick (MD), Ireland, Leicester (UK), London, Los Angeles, Madrid, Mount Kisco (NY), and New York City.
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Insurance law is the practice of law surrounding insurance, including insurance policies and claims. It can be broadly broken into three categories - regulation of the business of insurance; regulation of the content of insurance policies, especially with regard to consumer policies; and regulation of claim handling wise.
MS Amlin Ltd is an insurer operating in the Lloyd's, UK, Continental Europe and Bermudian markets. Specialising in providing insurance cover to commercial enterprises and reinsurance protection to other insurance companies around the world, MS Amlin's shares were listed on the London Stock Exchange until it was acquired by Mitsui Sumitomo Insurance Group in February 2016.
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