Everyone knows that the best underwriters are supposed to do lots more business when pricing is great and decline all but the highest quality and most loyal custom when rates soften.
But that is a hard strategy to execute in reality.
It is tough turning your friendliest brokers away and the apocryphal playing of golf is not a viable career option for market traders. In any case, once expense ratios edge above 40 percent (as in London now) the pressure of pure numbers gets too great.
It is always easier to rationalise keeping a decent underwriter in work writing marginal business than to take the tough decision to let them go.
But maybe relative success is naturally built into some markets’ DNA?
Perhaps they were born to be contrarian and counter-cyclical but without having to make tough decisions?
Their concentration in specialty, reinsurance and wholesale lines means that in softer times clients and brokers send less business to global hubs like London and Bermuda.
We know how it happens – capital-rich insurers start to retain more and buy less reinsurance. They also start writing more daring and experimental covers. Meanwhile retail brokers decline to share dwindling brokerage with overseas wholesalers and instead place more into these burgeoning local markets.
But as they bemoan their relative decline many in the hubs forget that the most of the business now not being shown doesn’t make acceptable long-term returns.
This means less bad premiums get written in global surplus hubs, simply because less is being shown there. This is sheer cyclical luck – not underwriting genius.
When markets harden everything goes into reverse.
Global insurers return to their core areas of competence and exit speciality lines, forcing retail brokers to go back out into the wider world to get business placed. Reinsurance demand also increases significantly as insurer capital becomes constrained.
The end result is that global reinsurance and specialty hubs should automatically end up writing relatively less when they should be contracting and writing more when prices are good.
They should automatically outperform over time.
The real danger has always been when, while close to the bottom of a cycle, the global surplus, specialty and reinsurance fraternity mistakes a cyclical downturn for a permanent secular shift and belatedly embarks on expansion.
Instead of automatically buying low and selling high, it suddenly does the opposite.
Isn’t that what many have been doing in the past few end-of-soft-market years?
Never mind that the results of doing this in the past have been near apocalyptic.
It is striking how few carriers ever dare to practice the cycle management that they preach. Avoiding soft market expansion into new lines and territories is as hard as declining business from a favourite broker.
Doing nothing is just so difficult.
Everyone wants to see a plan of action, when often it is inaction that is the best strategy.
But to periodically play dead would mean that many would have to admit that their individual risk picking skills are not what they would have us believe.
Indeed, if cycle management were the only true underwriting skill, it would be hard to justify paying a high premium for underwriting talent.
Now there is a cheery thought as the cold winter of a deep soft market begins to bite!
To read the Winter 2016 issue of IQ, please click here.