That underwriting cycle
Anton Ossip CEO of Alexander Forbes (AF) Risk and Insurance Services, says that the insurance market terms softened in 2004, and they expect it to remain generally soft going into 2006, although there are exceptions to rule, such as mining and petro-chemi
Jurie Erwee, MD of AF Risk Services, says that there are always exceptions to the rule. Commercial insurance – for example, and the mining sector, specifically - currently the markets haven’t softened.
Gari Dombo, MD of AF Personal Services, says that pricing is going down when the results are good. If the results of underwriters are not as good, then their pricing will increase. Underwriters can’t rely on investment returns in a low interest environment and thus have to depend on underwriting profits and premiums.
There has been a tightening of legislation as clients question the value that insurers bring. It’s also a numbers game – in terms of reducing the cost of processing claims. He also warns clients to not assume that they have the cover. This only becomes evident once there is a claim.
He was talking up the role of the broker and more specifically the professional broker. He suggests that clients should check that their brokers have professional indemnity cover, or fidelity insurance. This is a fallback in case the client gets inappropriate advice.
Ossip says that on a global level the Lloyds market is very competitive at the moment, with a lot of the big risks being placed, while the reinsurance markets are also competitive, due to the absence of catastrophic losses. Added to which personal insurance is also competitively rated.
This has always been a competitive market – with many players – keeping it efficient. There are a myriad of products with none of them being the same.
On the commercial front, there is keen competition for market share among insurers, while the corporate sector can expect to see rate reductions. On the personal lines front the direct insurers are still aggressive, but the market is leveling off, as seen by a move into other market sectors.
He used the UK market as a possible scenario, which showed that there is a leveling off, and there will always be a segment of the market that wants to go direct.
So what about the short term insurance underwriting cycles? Ossip says that the local market is at the bottom of the graph trend line. According to Munich Re, the cycle has several issues that play a role.
It all starts with the lack of sophisticated pricing tools, and then there is the influence of the credit rating companies and their ratings of insurance companies.
The credit ratings will probably reduce the height or amplitude of the cycle, as companies will be less likely to move premiums up or down too much as the ratings agencies will revise their ratings accordingly.
Other elements that impact the underwriting cycle include the dreaded herd instinct, a focus on market share, the impact of high investment returns on the efficiency of the business, the negative impact of sudden major losses and disasters, the lack of patience exhibited by investors, and perhaps most importantly – the overcapacity of capital.
Ossip says that the local short term ombud should provide consumers and industry players sight of those companies that have developed track records – for whatever reason. It is estimated that the ombud deals with around 600 complaints per month.
He (ombud) should disclose who the good and bad eggs are, like those companies that look to pay claims and those that don’t. Its time to disclose this so that consumers can make informed decisions.
