Soft markets - soft targets

UK Insurers have reported improved results for 2003, a trend likely to continue into 2004, and insurers have taken a lot of action since the huge losses of five years ago. Improvements have been achieved through rate increases and focusing on the core disciplines of risk selection, risk management, efficient and cost-effective claims handling, and tight cost control. However, with the emergence of profit, we are now seeing the start of price competition.

One area that is showing signs of softening is the UK domestic liability market. Liability has suffered from a lack of capacity in recent years and has been subject to a government-led review to tackle the problem.

With fundamental underlying problems such as claims for latent injuries, the softening of the market could mean that the pressure to deal with such problems could diminish.

The cyclical nature of the market is a consequence of the structure of the industry, involving high fixed costs and low barriers to entry. There is also a long lead time between business being written and losses being finally settled and, in the interim, underwriting results can only be estimated. It is possible for unprofitable business not to be recognised for several years, tending to prolong soft markets.

The key issue for insurers is how underwriting cycles are managed. When focus on core disciplines is strong, profits emerge. However, these can quickly disappear when companies are put under pressure to compete over prices. This is particularly true as new firms enter the market or existing firms shift their strategic focus. In either case, specific market knowledge may be lacking. Even small players can destabilise large sectors of the market.

It is therefore important for established insurers to maintain discipline.

Usually, as the cycle moves to a softer phase, market share and protection of distribution channels take precedence over profit and risk management.

History demonstrates that the insurance industry has lost billions in pursuit of elusive goals based on market share, relationships or critical mass.

Given the renowned promiscuity of some customers, insurers and brokers need to maintain a sense of proportion around the value of relationships, keeping a keener eye on risk and profit.