Underwriters can’t be expected to take views on questions of capital supply and demand

A changing market brings a new dimension for underwriters.  

In a soft market the value of capacity is constantly falling. This makes it obvious that when a profitable risk is presented the line should be offered and hopefully bound as soon as possible. There is no sense in waiting until tomorrow because tomorrow the price and prospective profitability of the same risk will be lower.  

But as the price of insurance rises in a hardening market, the underwriter has a new call to make. If the value of capacity is rising should they put their line down now, or hold something back for later when the price has risen?  

The situation asks a new question of the underwriter – what is my view on the state of the market and its prospects? Is this price rise going to be short-lived or just the start of a bigger move? Will I regret having held back capacity or will it be a masterstroke?  

The trouble is these are not questions that underwriters are any good at answering. Such lofty matters are best left to economists – and we all know how terrible they are at predicting anything. 

An underwriter is there to price the risks in front of them and if the price available exceeds the risk by the right margin they should underwrite. This is a complicated enough role – risk is extremely difficult to price.  

It is not for an underwriter to take a view on high-minded macro questions of capital supply and demand. Underwriters are not futures traders. 

There are some obvious special situations when some capacity should be held back. For instance, when a big risk like the Rolling Stones world tour hits a tiny market like contingency it is a sensible tactic to keep a little powder dry.  

A big cancellation risk like a mega world tour has many insurable interests and if an underwriter blows all their capacity on the main global programme they will have nothing 18 months later for when a desperate local promoter in Budapest wants cover for the two Hungarian dates and is willing to pay a decent premium over the going rate to get a deal. 

But in bigger, deeper and more liquid lines underwriters shouldn’t think twice. They should do the business and fill their boots whenever they can.  

If that means hitting capacity constraints that is not their concern. Legendary hard market stories of Lloyd’s underwriters writing all their limit by summer and going on holiday until November are always told about famously successful market players, never failures.  

Such star performers recognised their prime role and if the market allowed them to fill their quota six months early they did so without hesitation. They were putting food on the table when it was abundant. It was their manager’s job to pre-empt capacity and raise or redeploy capital if they thought it could be put to work later in the year, not theirs. 

A few weeks into my fledgling broking career, I was sent out with what transpired was a no-hoper risk. It was a way of getting me around the market and talking to people.  

Of course, nobody told me this at the time – I thought it was my fault that everyone was politely declining. After a miserable day of failure I came back to the office particularly demoralised 

My boss took me aside and told me something that stayed with me ever since: “Never forget – underwriters have to underwrite.”  

That didn’t make me feel any better, but I did learn that an underwriter’s fundamental role was to produce income that met their prospective return hurdles. 

As today’s market hardens in pockets, those who find themselves in the right place at the right time should take what is in front of them and not worry about holding back for a mythical prospective Eden. For if it proves to be a mirage they will only have themselves to blame.