“Cycle” should not be industry “alibi”: Prettejohn

Insurers have to act on the industry underwriting cycle rather than using it as an excuse not to act, Lloyd’s CEO Nick Prettejohn told a London audience Thursday.
Speaking at the Financial Services Authority’s Insurance Conference, Prettejohn says the biggest challenge facing the industry is for insurers to “make a profit on underwriting on more than an occasional basis”. He adds the tradition return period for underwriting profit of 25 years must be shortened. “It is not possible for the industry to make an adequate return for its shareholders unless that happens. The arithmetic simply does not work.”
The industry should be focused on generating return on capital, and this should be its number-one metric, he asserts. A “major weakness” is insurers’ inability to understand the cost of what it sells, and what business is unprofitable, on a timely basis.
And the insurance cycle can no longer be used as an excuse for poor performance. “Stop talking about the cycle as though we are utterly powerless in the face of some all powerful dialectic,” Prettejohn urges insurers. “No one can deny the existence of the insurance cycle, but it is not an alibi for management inaction.”
At the same time, management must resist the pull of volume-based underwriting, says Prettejohn. “Resist the temptation to grow, succumb to the need to prune.” Capital markets and corporate management will both need to relearn this approach to underwriting for profit rather than marketshare. And the lines of communication between underwriting and management need to be as short as possible, he adds.