Don’t be left zigging when the market is zagging
As recently as two years ago, wise heads within the insurance market were channelling their inner Francis Fukuyama and declaring ‘The End of History’, or specifically, ‘The End of the Insurance Cycle.’ The availability and enthusiasm of capital meant if there was a risk to be written, someone would write it, and if there was a good risk to be written, someone would write it for less. An acceptance of the end of the insurance cycle as fact has huge ramifications across a whole organisation: How do my underwriters underwrite? What should my technology be set up to achieve? Declaring ‘The End of the Insurance Cycle’ was as misguided as ‘The End of History.’ The patterns and cadence have changed, but the triggers are still there; smart investors don’t like losing money, so they will withdraw or demand change. After a decade of building a business in the never-ending soft market, the key question is, how do organisations change when it ends?
Underwriters who cut their teeth in an ever softening market, who didn’t have the pen back in 2011, or even 2004, will only have experience of underwriting in that environment. An environment where what was dismissed out of hand as a bad risk last year comes back this year with a 5% rate reduction and is now a good risk. An environment where flat means more capacity out, more coverage, more policies, and fewer exclusions.
Old heads in the Lloyd’s market will reminisce of times where brokers couldn’t sit down at the box without asking permission, let alone have the guts to speak without being spoken to. This belies a fact of understanding how to operate in a hard market. The questions an underwriter asks themselves shift from ‘How do I write this risk?’, ‘Can I afford not to renew?’ to, ‘Should I?’, ‘What needs to be included or excluded for me to consider it?’. The question for insurers to ask themselves is; are they equipped with the right tools, and do they have the flexibility to adjust?
In the last ten years, the technology around the underwriting process has evolved enormously. However, it has evolved and been implemented with the same institutional biases towards the never-ending soft market, with a focus on cutting operating cost and an assumed consistent downwards pressure on rates rather than volatility. Authority rules are built with rate changes limited to stop rate reductions but unable to capitalise with agility rate rises. Auto-renewals hope to go as expiry but are built towards managed reduction and are unable to flex to re-underwrite coverages, exclusions, or push rate.
Technology landscapes are built around getting policies on the books, and business rules are built to keep everything as close to the prior year as possible. With the market being more volatile, agility is king. Before technology, you were as agile as your people; now, as we’re in a technology business, you’re only as agile as your technology.
Being stuck in a zig when the market is zagging is every incumbent’s worst nightmare. So, it is vital to have the flexibility to adjust your business rules, processes, product sets to ensure that you’re making hay when the sun is shining, or consolidating when it’s not. Having tools with the flexibility to adjust baked-in processes to match or be ahead of market trends will allow you to leverage the experience of those who’ve seen it all and put it into practice rather than simply be an anecdote about how entrepreneurial underwriting used to be.
Empowering your underwriters with data showing what the market is doing with rates and coverage at the point of making decisions will give them the power to capitalise on these changes. Having a clear view of how their distribution network is performing against those trends will give clear lead indicators for who and where they can push or pull with those relationships. If the game changes, you need to change with it.
The insurance cycle is still here, it may be different in terms of cadence, but there will always be times to push and times to pull. Your organisation has the talent and experience to navigate through choppy waters. Some people may have to reformat their approach to underwriting, and some of the old stories about the market 10 or 20 years ago will need to resurface to help that journey. However, given the length of the last soft market, your technology may not have that same flexibility or ability to reformat its approach to your business. Putting data that shows where the market is going in front of your underwriters when they’re underwriting will give you the edge to dial-up and dial down as the insurance cycle dictates. Agility and flexibility are key, or you’ll be left zigging when the market is zagging.