Underwriting discipline is only partly to blame

We know that underwriting conditions are becoming increasingly difficult and, naturally, the finger is pointing towards a failure in underwriting discipline. When challenged, the management of some insurers have responded by acknowledging the problem and identifying training and competence as key factors.

This is only a small part of the answer to a complex question. It would seem to suggest that soft markets are instigated by inexperienced underwriters but surely this is not the case. Inexperience may be a contributory factor but the downward trend in pricing is initiated by those who have the status, the power and the authority to compromise pricing - people who may have witnessed a number of cycles. In other words, it is the senior managers and their underwriters who not only create but sustain this momentum.

We must, therefore, look more closely at what is influencing the decisions underwriters make on a day-to-day basis. Is it a lack of direction and decisiveness at the top or a desire to match or beat financial targets set in more benign environments? Is it a drive for market share at all costs? Has complacency set in following a few years of getting it right?

We should look at all these factors before hiding behind training and competence.

So what is the broker's role in creating a soft market? Contrary to what buyers might think, insurance is a keenly priced commodity and the result of intense competition between brokers chasing the business. The ferocity of this competition contributes to a lack of discipline, with extravagant promises being made to prospective clients about savings on price, often before the panel of insurers has been brokered and a letter of appointment signed. Under pressure to capture business, some brokers are prepared to overlook the existence of carefully prepared partnership deals that are designed to provide stability and certainty. Unfortunately, they are aided and abetted by insurers not prepared to recognise these deals. So, scrutinising broking practices may aid our understanding of soft market dynamics.

The challenge of delivering a technical underwriting profit is difficult; relying on good fortune and investment income merely adds risk on risk.

During the past few years, underwriters recognised this truism and maintained discipline, priced correctly and achieved stability - a return to this is not impossible.

One of my early mentors taught me "turnover is vanity, profit is sanity", which is as true today as it was then. Let's look beyond training and competence, and address the issues with strong leadership from our trade bodies - this is a duty we owe to all our stakeholders.