Ted Belton, author of “The Belton Report”, says in the latest quarterly issue that pricing cycles cannot be blamed on surplus financial capacity. Although the industry has been consistently overcapitalized for two decades, pricing has continued to fluctuate. “The driving force behind fluctuations in the availability and cost of property and casualty insurance is underwriting capacity, which is determined by the willingness of shareholders to put their capital at risk,” he writes.
Belton says the “imbalance” between supply of capital and demand is a “chronic condition” for the industry, with a premium-to-capital ratio guideline of 2.5:1 being consistently missed for the past 20 years. In 1999, the ratio hit an all-time low of 1.08:1 for insurers and 0.57:1 for reinsurers, he muses. But, he notes, the ratio has never been higher than 1.63:1, where it stood in 1982. This makes it clear that surplus capacity is not the key to market cycles, he concludes. “If financial capacity were the driving force, the marketplace would have been in a constant soft state for the last 20 years because financial capacity exceeded what was required.” The three hard market periods experienced in the past two decades are evidence that this is not the case.
First-quarter 2001 financial returns do suggest that insurers are taking price action, Belton says. The industry’s poor results of the past few years are spurring rate hikes combined with tighter underwriting controls. In this light, he expects bottom-line improvement will only take hold in 2002 due to the lag between premiums written and earned.
