Mid-sized insurers riding market cycles better than smaller and larger counterparts

Few U.S. property and casualty insurers excel at managing through market cycles, but mid-sized insurers (surplus between US$10 million and US$100 million) seem to be better at it than their small and larger-sized counterparts, a special report by A.M. Best has found.
Also, top performers at managing the cycles tend to focus on underwriting to generate profits, manage their reserves conservatively and are less likely to use their investment income to prop up a poor underwriting performance, A.M. Best found.
Commercial property and casualty writers comprised a larger share of the top performers at managing the cycle than the total population of U.S. insurers in the study.
The study, entitled ‘Few Companies Excel at Managing Through Market Cycles,’ looked at U.S. industry results during the peak years of the prior soft cycle (1997-2001), the subsequent hard market (2002-04) and the early years of the current soft market cycle (2005-06).
The ratings agency used underwriting performance, as measured by the statutory calendar-year combined ratio, as the basis for classifying companies’ ability to manage the market cycles.
Overall, “the findings from A.M. Best’s cycle management study show just how difficult it is for property/casualty (P/C) companies to surpass the performance of their peers on a consistent, long-term basis,” says the report. “Only 14% of the total study population [of 1,011 companies] outperformed their industry composite medians over the most recent soft and hard market cycles.”
A.M. Best’s findings noted more mid-sized companies appeared to factor in the top performers than smaller- and larger-sized firms. It noted several possible explanations for the differences:
without economies of scale, smaller companies find it difficult to maintain a competitive expense ratio, and fixed expenses make up a larger share of their income than those of larger companies;
smaller companies rely more heavily on third-party reinsurance, and the costs associated with this will have a more adverse impact on results than would be the case for larger companies;
larger companies may be less able than smaller companies to make rapid adjustments to meet competitive demands;
larger companies write in more diverse lines. Although this may result in less underwriting risk, it may also make it more difficult for larger companies to take advantage of opportunities to earn better-than-average results.