Lloyd’s seven steps to managing the cycle

Insurers should refuse to ‘follow the herd,’ provide the right incentives for underwriters, and invest in risk management tools in order to successfully manage the insurance cycle, according to a report recently released by Lloyd’s of London.The report, Managing the Insurance Cycle, warns that there still exists a considerable amount of uncertainty regarding prices and conditions in the commercial insurance market following the 2005 hurricane season.According to Lloyd’s, the insurance cycle has historically been characterized by peaks and troughs that reflect the rise and fall of insurance prices. “In the past, insurers have simply accepted the insurance cycle, seeing it as a force of nature with an uncontrollable impact on their business,” said Rolf Tolle, Lloyd’s director of franchise performance. “But at Lloyd’s we believe insurers now have the information and the tools they need to manage the cycle much more effectively.”The report recommends seven key steps to help the industry become more predictable and underwrite on a sustainable basis for the benefit of both policyholders and insurers. They are: don’t follow the herd, invest in the latest risk management tools, don’t let surplus capital dictate your underwriting, don’t be dazzled by higher investment returns, don’t rely on ‘the big one’ to push prices upwards, redeploy capital from lines where margins are unsustainable, and get smarter with underwriter and manager incentives.”Market condition are changing with rates softening in a number of lines and we believe that it is now more important than ever for insurers to take action,” Tolle advised. “We have already done a lot of work on this at Lloyd’s to encourage underwriters to mange the cycle, but the real test of a soft market is still ahead of us and there remains much to be done.”