The shape of things to come

If it sounds too good to be true, it’s usually too good to be true. We all watched the boom of recent years, with its spiralling house prices, knowing it couldn’t carry on. And it didn’t.

The surprise has been the state of the banking and liquidity crisis and, frankly, the negligent behaviour that has been exposed.

Those of us who manage underwriting accounts chant a mantra: if you can’t identify it, you can’t measure it and, if you can’t measure it, you can’t manage it. There has been too much lending to the wrong people and then parcelling the debt all around the market. No one really knew what exposure they were running. Madness.

But it is remarkable how little impact this financial crisis in banking has had on the underlying strength of most property and casualty (P&C) companies.

Most of us have learnt our lessons. We value and protect our capital and have put in place risk control, governance and capabilities to ensure we do just that.

However, the fallout from this turmoil will be felt by P&C insurers and we need to face up to increased problems.

We are just reaching the end of the soft cycle where, since September 2003, we have seen rates reduce, terms and conditions loosen and commissions rise. Most insurers have been making plans – some have actually taken action – to put right their books as returns have deteriorated and prior year claims run-off surpluses have run out.

The fall-out from the financial markets will add severe recession and reduced investment income into those plans. That means – officially – that the soft market has finished. And the increase in rates will be sharper than would have been the case.

Pricing has been much more aggressive in the past six weeks – something welcomed by insurers.

All this means extra pressure for many areas of our businesses. Recession will bring a sharp increase in claims and fraud, coupled with a reduction in turnover.

Insurers’ and brokers’ costs will need cutting to match and we have already seen sensible job cuts and closures.

That puts pressure on customer service – although it never ceases to amaze me why many companies wait until the position is desperate before taking action. Ironically, taking action will mean people with experience and knowledge, or those who add extra services, will leave the industry. The time to put staff levels, location and business models right is before the downturn.

The consolidator model, which has been dominant in commercial distribution, will come under special pressure. Rising costs and falling commission and revenue will mean a quieter period here.

Insurers and brokers who have kept their businesses in good shape (there are some about) can take advantage of these times. They will become clearer to spot in 2009 as they slowly open the Christmas gift of being able to grow in a hardening market.