The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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Times are tough for the (re)insurers as they face pressure from all sides: Investment returns are stagnating, analysts are questioning how long they'll be able to keep pulling reserve releases out of the bag, and rates for most lines are still dropping with no sign of a market turn in sight.

The conditions are such that Barbican commercial deputy underwriter Conor Finn comments: "All I ever hear is underwriters complaining about rate cuts."

But are London underwriters becoming too tolerant of this state of affairs?

And is their willingness to bear the brunt of falling rates even prolonging the soft phase?

One American analyst certainly came away with that impression on a recent visit to the market.

Although reinsurers did not think a turn in the market was on its way, they continued to have a chipper view of untapped opportunities and seemed to have become inured to the soft market, Matthew Carletti of JMP Securities wrote.

He reported that one manager even compared the London viewpoint to "Stockholm Syndrome" - the psychological condition that makes hostages loyal to their captors and grateful for any scrap of good treatment.

"It is this very feeling of being content that will only further delay a market turn as it clearly illustrates things aren't viewed as being bad enough yet to warrant raising prices or to stop writing altogether," Carletti noted.

So, does the industry itself think Lime Street stoicism has turned to masochism? Could they be fighting harder against the soft conditions?

Alan Telford, senior vice president and underwriter for Liberty International Underwriters, works in professional indemnity - a class of business that is taking more than its fair share of punishment at the moment.

There's no sense of affection for the soft market among underwriters, Telford says.

"I'd use the phrase 'resigned to it'," he adds.

But he does see an element of underwriters having become so used to soft pricing that they're no longer protesting against it.

"Unless they're told otherwise they'll carry on doing it, because they do have a budget to meet," Telford says.

And although few will talk about it - and even then, it will be spoken of as something their competitors engage in, rather than themselves - an element of that budget is still linked to premium volumes, rather than profit levels.

"The first thing [underwriters] will be asked at the end of the month is 'did you meet the target' and I can guarantee you that means 'did you write enough business?'" Telford said.

It takes longer for insurers to see their results than ordinary widget-makers, for one thing.
But even if they are awake to potential under-pricing, is there any alternative when there is more capital supply than demand for (re)insurance products?

Advocates for "defensive underwriting" hope so.

"You need to find a way of trading through soft markets," Finn says. The challenge is to refocus an underwriting portfolio to suit the conditions, finding pockets of well-priced risk.

However, while it might be clear which lines prices are rising and falling, the underwriter's task is to pick the right battles to win a piece of business.

Telford points out that it is easy for underwriters to be seduced into discounting business for "good" clients - but only time reveals if they have chosen right.

"The way insurance works is that it is a pool of like risks - you have to charge an equitable premium to allow entry to the pool so that the misfortune of the few can be paid for by the good fortune of the rest," he says. "The equitable premium part doesn't seem to apply anymore."

Even in the most "cycle management-minded" of firms, underwriters are hardly likely to feel secure during a soft market.

The casualty cases show that some people do not want to underwrite themselves out of a job, says Beazley accident and health underwriter Chris Branch, paraphrasing Warren Buffett: "When they get in a hole, they keep digging."

Companies need to have incredibly strong structures in place to help underwriters feel confident that pulling back on business will not threaten their position, he says.

The frustrations must be huge for underwriters - they are all feeling the pain, raging at the prices their competitors are quoting and yet their only option is surrender, either by matching low prices or by walking away from business.

Short of forming an illegal cartel, it seems there is nothing underwriters can do to hold the pricing line.
Perhaps the next best (and also legal) environment for maintaining discipline is found in the Lloyd's market, with Tom Bolt and his Franchise Performance Directorate [FRD] supervisory team ready to rap the knuckles of any syndicate that misprices its risk.

Self-effacing American Bolt, in fact, has seen his Lloyd's "tsar" role change over the last year amid adverse market conditions. His CEO Richard Ward, speaking at the recent Xchanging London Market Conference, described this as a change from being "Mr Motivator" to "The Enforcer".

Make my day
Bolt's transformation from good cop to Dirty Harry gives him the brief not just to police and mentor standards, but also to close down syndicates if underwriting standards are not met.

"The Enforcer" made this plain at a private meeting of senior Lloyd's market executives at the end of November, when he outlined his department's concerns about syndicate business plans for the 2011 year.

A recent ethnographic study of the Lloyd's market commissioned by the Insurance Intellectual Capital Initiative found that London players were highly conscious of the schadenfreude delight colleagues would take from their losses "in a market where actions are highly visible". But Professor Paula Jarzabkowski also noted that this "herd instinct" could provide market confidence and stabilise pricing.

The current market shows both expansion and retraction at Lloyd's.

Although there are still eager new participants waiting for entry - with French reinsurer Scor and Norwegian protection and indemnity insurer Skuld given the nod this autumn - established players such as Hiscox and Ascot have proven they are willing to pull back by cutting their stamp capacity for 2011.

Bolt is continuing to widen the focus of his disciplinary team, warning syndicates that their claims departments must be up to scratch and that new entrants will be scrutinised closely.

Surely syndicates must be pushing his boundaries and testing the limits of the central authority in the soft market?

"There is always healthy dialogue," Tangy Morgan, deputy head of underwriting at Lloyd's, says tactfully. She says her team's workload has remained constant throughout the market cycle.

One particular focus at the moment is assessing syndicates' plans to expand into new lines - something they are all no doubt keen to do to compensate for declining volumes in low-priced lines.

"We are having more challenging discussions, yes," Martin admits.

But it seems the market likes having these boundaries.

Support group
Branch describes the London market as a "support group" that encourages an entrepreneurial spirit.

Just because there's no sense of doom and gloom it doesn't mean the market is underestimating the soft market, he says. "Underwriters are like farmers - you can moan that it's too hot or too cold but you have to get on with it."

One relationship that may be less tight-knit in these testing times is the one between brokers and
(re)insurers.

The broker's role is clearly to look out for their client's interests, but is there a fine line between good negotiating and unfair pressure?

Roger Bramble, chairman of Lloyd's broker BDB, argues that large brokers are having a "noxious effect" on the market by going too far in threatening to pull accounts if rate reductions are not accepted.

Still, Bramble concedes that the ultimate problem returns to the economics of supply and demand, which can buffet powerless underwriters during the soft market.

"It's bigger than we are," he says.

Perhaps, then, the soft market is a conundrum that only the masochistically inclined should ponder.