Tick tock: It's Underwriting o'clock

Time is a precious commodity. In the world of underwriting, it is both an adversary and an ally – a resource we measure, manage and sometimes misread.

As an avid watch enthusiast, I'm fascinated by the craftsmanship, precision and cyclical nature of all timepieces. Although there is one model that has intrigued me more than others over the past 40 years, the underwriting cycle clock (see figure 1). Developed in 1985 by Paul Ingrey, it is a visual tool used to represent the cyclical nature of underwriting and market conditions.

The clock is divided into segments that illustrates the phases of the insurance cycle and helps insurance professionals anticipate market trends and understand the profitability and sustainability of insurance operations over time. And, while the insurance landscape today presents challenges and opportunities that are more interconnected to those faced 40 years ago, the underwriting clock ticks on, and its cycle is in many ways still applicable today.
 

Just as there isn’t a single, universal time zone that applies globally, the underwriting clock isn’t a case of one-size-fits-all either. A range of conditions are currently exhibited across various lines – in some we see unpredicted accumulation or shock risks impacting risk appetite and in other lines we see higher interest leading to a competitive market – and so where you are on the underwriting clock depends on the sub-line of business and the specifics of the risk class being underwritten.

Property Cat, for example, is currently characterised by increased competition, nevertheless, there are pockets of difference. The unprecedented LA wildfires that resulted in estimated insured losses of USD 40 billion, are driving rate and adjustments to conditions in California.

Conversely, in the case of liability lines, we see more demand than supply – especially as legal system abuse in the US remains an ever-increasing issue that is unlikely to be fully resolved without tort reform or new insurance products that provide more certainty to the long tailed nature of this class of business.

Generally though, from what we saw at the 1 July renewals and early this year, the market is competitive in a sense that it erodes margins. That said, terms and conditions and structures have remained intact because of disciplined underwriting. In other words, supply is available if structures and wordings are clean.

Again, it is important to emphasise that the time on the underwriting clock differs depending on the specific market conditions facing each individual line of business. Therefore, underwriters must take a segmented approach when evaluating their portfolios. Understanding where each line stands on the clock is essential in making informed underwriting portfolio decisions.

This is not to say that the underwriting clock implies that risks themselves move in predictable cycles. Far from it.

Back in 1985, insurers were tasked with tackling a very different set of challenges. Double-digit inflation, the cold war, and the devastating Earthquake in Mexico City were all prevalent issues and events. On the liability side, asbestos was emerging as a major concern, which eventually triggered tort reform and a regulatory pullback that had led to the soft market in the late 1980s.

Fast forward to today, while some echoes remain – war remains a headline risk – the landscape has changed quite a bit. Cyber risk, which was virtually unheard of in 1985, is now a relevant insurance class reaching USD 20-25 bn in the next few years. It comes with its own challenges… and opportunities.

Natural catastrophe losses also illustrate how the magnitude of risk has grown. In 1985, NatCat led to USD 13 billion in annual insured losses according to Swiss Re sigma records. Today, global insured catastrophe losses will likely approach USD 150 bn for the full year based on the latest data from the Swiss Re Institute.  The good news is that the reinsurance capital (see figure 2) has kept pace with that increase and shows how resilient the reinsurance market is, equipping it to absorb shocks of this magnitude.

The presence of risk hasn’t changed, but it continues to morph and evolve. For insurers and reinsurers, it is not viable to rely solely on historical assumptions. Underwriting decisions must reflect today’s markets, which means embracing an honest, unbiased view of risk, and ensuring that loss ratio projections are grounded in the present.

Risk data transparency is important. Without it, Underwriters will either not re/insure a risk or charge more to compensate for the lack of information. Relationships with brokers and risk-taking partner's matter in this regard – exchanging on the nature of the risk, creating a high level of trust helps to align interests in fast moving markets and ensures everyone is clear on the rationale behind pricing and coverage.

And markets do indeed move quickly. In 2022 the insurance market was at crunch time – the start of the hard market, where several years of under-pricing put reinsurers in a position where they were struggling to earn their cost of capital.

The underwriting clock remains a valuable reference point for this, but it’s not always linear. It can jump forward or even tick backwards if market shocks demand intervention.

This is why diversification is crucial. Just as watches require regular maintenance to function optimally, the insurance industry must be able to account for and adjust to the changing tides of risk and opportunity.

The underwriting clock is not a perfect science – the world is too complex for that. But it’s still valid today, albeit ticking faster than ever. The faces are the same, but the pace has changed, from the liability crisis of the late 1980s to 9/11, Hurricane Katrina, the Global Financial Crisis, the Covid-19 pandemic to the war in the Ukraine. Each of these events has moved the clock, but not every line ticked in the same way.

Within the current landscape, time is of the essence. As the insurance industry, we must ensure our underwriting strategies align with the rhythm of events.