Insurance pricing is cyclical and the market is currently at the top of the hard market cycle. While traditional models attribute this to supply and demand, human factors play a more significant role. Herd mentality, or group behaviors driven by a need for recognition and belonging, can be spotted, tracked, and actively managed. These behaviors affect management as well as underwriters and are evidenced by insurers and reinsurers all looking to grow or cut back at the same time.
UWX has conducted research in conjunction with SBS Swiss Business School and the International Association of Engineering Insurers (IMIA) and has mapped out the behaviors associated with different phases of the cycle. When results are good, insurers are confident and pivot to growth, assuming they can scale their businesses without compromising on underwriting performance. This soon translates into fear of missing out, with all insurers fighting to grow at the same time. Premium targets balloon, and underwriters are tasked to produce rather than underwrite. Underwriters recognize that terms are softening and becoming unprofitable but are motivated to meet the premium targets they have been set. Ever more compromises are made, and underwriters start to accept whatever terms they are offered.
Eventually, reality bites, and the unprofitability of particular portfolios can no longer be ignored. Managers see these as specific problems requiring specific remediation. However, this focus on specifics becomes untenable as adverse development emerges across the broader portfolio. This is when management demands fundamental change and orders the company to go back to basics. The focus shifts to the bottom line, with underperforming lines and teams culled. Market communication emphasizes discipline, brokers are forced to narrow terms and increase prices to secure capacity, and management points to improved technical pricing and other green shoots of recovery.
UWX research and analysis have shown how behavior and communication change over the cycle. In the next couple of years, for example, current behavior and communication would suggest that the strategic focus for many insurers and reinsurers will shift more explicitly to premium production, also known as underwriting for top line. To accommodate this, we are likely to see other behavioral tells, such as pressure on underwriting managers to broaden internal guidelines and appetite. There will also likely be a focus on optimizing reserving practices so that they are less conservative.
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