Underwriting Cycles and Business Strategies

Underwriting cycles, with their wide and puzzling swings in premiums and profitability, challenge the pricing actuary to knowledgeably adapt rates to market realities. Understanding the forces behind insurance price fluctuations is the precursor to adeptly predicting future market movements. Analysts often ascribe underwriting cycles to actuarial rate making procedures, underwriting philosophy, or interest rate volatility. These interpretations do not withstand even casual scrutiny, portray insurance professionals as incompetent, and ignore the competitive pressures and business strategies that drive insurance pricing. Underwriting cycles, like profit fluctuations in other industries, reflect the competitive interdependence of rival firms. Policyholder loyalty and demand inelasticity hold the allure of large returns, but the apparent ease of entry into insurance, the lack of market concentration, and the difficulty of monitoring competitors' prices preclude economic profits. The interaction of these forces keeps the market in disequilibrium, with continuing price oscillations. Keywords: Profit Factor, Rate of Return, Risk