The 2013 results reporting season is now under way and as anticipated all the major insurance firms in London and Bermuda are delivering superb numbers; most benefiting from the especially low cost of catastrophe claims last year. For those risk carriers operating at the specialist end of the market, the good times have rolled on and on for more than ten years which is an unprecedented period of profit by historical standards. Yet the champagne soon to be quaffed in the wine bars around Lime Street and on the Hamilton beaches will have a sour aftertaste given the rapid slide in premium rates over the last few months. We might be experiencing the last hurrah before the downturn according to Insurance Insider reporting last week on an interview with veteran industry analyst Chris Hitchings.
The party might well be drawing to a close but a headlong drop into a loss-making gutter can be averted and the signs are encouraging. With few opportunities for anyone to grow profitably, Beazley have set the tone in returning to its owners a special dividend representing a big chunk of its 2013 profit. Others will follow suit. Giving back unwanted cash to investors speaks to a prudence sorely missing in the old days when insurers hell-bent on growth wasted their surplus funds on disastrous takeovers and outlandish punts. Today the widespread adoption of technical modelling and improved levels of financial sophistication have introduced a new floor to market conduct that should deter reckless activity. At least that is the theory
However, news from the coal-face might not be so reassuring. Writing recently for Insurance Day, an underwriter from Aegis Tom Cole suggests that the indiscretion and inexperience of an increasing cadre of young underwriters could be the undoing of the market. He observes too many older, wiser underwriting heads seemingly incapable or unwilling to mentor their protégés and out of this schism the value of training and technical skills sacrificed. Tom’s ‘Generation Soft’ are tempted into short cuts, poor decision making and dangerous ventures outside of their area of knowledge. The industry should be worried. If this is true now then as competition intensifies further and income targets become more unrealistic, the pressure on these underwriters will make the situation even worse.
Insurance firms have taken giant leaps forward in managing their capital, investing heavily in financial expertise, analytical systems and controls. Yet in doing so some may have neglected to promote and incentivise good underwriter behaviour or nurture a supportive environment in which their teams can operate responsibly. The danger for the industry is obvious: all the positive strides in developing corporate resiliency will be undone if leaders fail to connect with the trading floor.