What Is an Underwriting Cycle?
Let me explain what an underwriting cycle is—it's the fluctuations you see in the insurance business over time. A typical cycle lasts several years, with market conditions swinging from boom to bust and back to boom. You might also hear it called an 'insurance cycle.'
Key Takeaways
- The underwriting cycle refers to fluctuations in the insurance business over a period of time.
- The fluctuations in the underwriting cycle consist of market conditions that go from a boom cycle to a bust cycle and over again.
- The underwriting cycle starts with many competitors and low premiums and then after a surge in claims and insurance company insolvencies, competition declines, and premiums go up.
- After this period, net entrants enter the market, increasing competition, resulting in a reduction in premiums and the underwriting cycle starts again.
- The underwriting cycle is one of the biggest challenges that insurance companies face and they constantly try to manage it to the best of their abilities.
Understanding an Underwriting Cycle
You need to understand that the underwriting cycle represents the ebb and flow between soft and hard insurance markets. At the start, the market is soft because of increased competition and excess capacity, which keeps premiums low. Then, something like a natural disaster hits, causing a surge in claims that pushes weaker insurers out of business.
With less competition and lower capacity, the surviving insurers get better conditions—they can raise premiums and see strong earnings growth. As claims get paid and new ones slow down, companies return to profitability. That's when new players enter, offering lower premiums and looser terms, forcing existing ones to match them, and the cycle repeats.
This cycle keeps going because most insurance companies chase short-term gains instead of long-term stability, writing policies without thinking about the end of the soft market. To protect against it, focus on saving capital and ignoring quick profits. You could set limits and build a reserve fund for tough times—disciplined efficiency directly impacts financial stability and long-term prospects.
Managing an Underwriting Cycle
Like other business cycles, the underwriting cycle is hard to eliminate—it's been recognized since the 1920s as a core industry concept. In 2006, Lloyd's of London called it the top challenge and surveyed over 100 underwriters, identifying management steps from the results.
Industry watchdogs say these cycles are inevitable due to the uncertainty in pricing insurance against future losses. The industry isn't fully addressing it, though. This cycle impacts all insurance types except life insurance, where data minimizes risk and softens the effects.
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