Best's Review


Risk Adviser
Plan Now for the Inevitable Soft Market

Successful insurers maintain underwriting discipline that anticipates a rate downturn.
  • Lance Ewing
  • April 2021
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A young man asked his wealthy father to sum up investing in the stock market. The man said to his son, “It is the strangest financial business model ever. One person sells a stock and another person buys the stock and they both think they are market geniuses.” Or so the story goes.

As with any investment there are ups and downs. Volatility is the arithmetical measurement of the distribution of return for a specific stock or market index. In most cases, the higher the volatility, the riskier the security. Conversely, the higher the risk, the higher the reward. Volatility is the most widespread degree of risk in financial terms. But that same volatility in financial investment commerce or the stock market applies to insurance and insurance underwriting, as well. Property/casualty carriers are continuing to appreciate the hard market and are riding the “up” with the higher premiums they are obtaining. But successful carriers know that the softening (the “down”) will appear on the horizon at some point in the life cycle of insurance. During the ups and downs underwriting discipline, similar to investment discipline, has to be followed. These pillars of P/C underwriting include:

Define Risk Tolerance and Stay the Course

• In any risk tolerance assessment, knowing your clients, their operations, their strengths and challenges and asking the probing questions to build trust leads to successful and profitable underwriting. Submission applications and automated processes are necessary but the one-on-one conversations with the clients are critical to staying within the underwriting risk corridor. In stock market investing, knowing the company's past and future outlook and its volatility before investing is smart business. So, too, with underwriting the client.

• Smart underwriting stays with the playbook and only audibles when there is a true need. Especially in the hard market keeping within the parameters of the underwriting protocols grows the book.


• Just as in financial investments, the right mix of instruments in a portfolio smooths the financial volatility by putting money into different types of investments and insurance underwriting is reflective of that philosophy. The spread of risk by industry, geography, catastrophe exposures, line of coverage, all help to stabilize the risks and the claims, even in a hard market. The segmenting of client exposures is vital to carrier achievement and cost-effectiveness.

• As legendary investor John Templeton said, “The only investors who shouldn't diversify are those who are right 100% of the time.” No underwriter will get it right 100%. There will be claims and losses that may or may not have been anticipated. These should be factored into the diversity of the underwriting portfolio.

Go Long

• The hard and soft markets of the P/C insurance cycle will almost assuredly continue. The underwriting cycle is one of the, if not the, prime tasks facing chief underwriting officers. Timing of the financial investment market is for many near impossible, but long-term investing provides time for absorbing the ups and downs of the markets. So, too, with underwriting. While premiums are up in this hard market, predicting when they will soften even slightly is a difficult forecast. Preparing now for the softening market is what wise carriers are doing.

• Warren Buffett quipped, “Our favorite holding period is forever.” Carriers with a successful track record and a reputation for having been around for a long time understand the mantra, forever can be a small window of time. They have an underwriting volatility approach of “this too shall pass” and “are we ready when it does?” These carriers recognize that premiums and investments today in the hard market will not be here forever. Building the underwriting process for the soft market downturn should not happen at that time but well beforehand.

Best’s Review columnist Lance Ewing is vice president of Enterprise Risk Management & Operations for the San Manuel Band of Mission Indians. He also is a former president of the Risk and Insurance Management Society. He can be reached at

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