Underwriting cycles and business transfer [Brian Hey Prize - 1st prize paper]

Document description

Underwriting cycles, with their wide and puzzling swings in premiums and profitability, challenge the pricing actuary to adapt rates to market realities. Understanding the forces behind insurance price fluctuations is a prerequisite to analyzing market prices. Underwriting cycles have been ascribed to actuarial rate making procedures, to under-writing philosophy, and to interest fate volatility. These interpretations underestimate the dynamics of the insurance marketplace, and they ignore the competitive pressures that drive insurance pricing. Underwriting cycles, like profit fluctuations in other industries, reflect the interdependence of rival firms. Strong policyholder loyalty and demand inelasticity hold the allure of large returns for incumbent firms, but the apparent ease of entry into insurance, the lack of market concentration, and the difficulty of monitoring competitors’ prices preclude excessive profits. The interaction of these forces keeps the market in disequilibrium, with continuing price oscillations. With the decline of rating bureaus and the growing competitiveness of the insurance marketplace, the proficient actuary may no longer set rates based solely on indicated costs. Insurers seek actuaries who understand the competitive forces that drive market prices and who can set future rates that are most advantageous for the firm. They seek actuaries who can ride the underwriting cycle.