Understanding What Drives the Underwriting Cycle

Posted Date: June 5, 2014

Industry InformationResearch 

The financial performance of the property and casualty (P&C) industry features both a little-recognized set of trends and a widely discussed series of cycles.

This new NCCI research paper examines both and concludes that each reflects a predictable response to a common driver—the business cycle and economic trends in general and investment income in particular.

The research includes a description of the conceptual link between underwriting and investment results. It is the challenge of trying to maintain a reasonable balance between these two fundamental measures of financial performance that drives the underwriting cycle.

In summary the paper shows:

  • Cash flow underwriting in pursuit of investment gains is more of a driver of the underwriting cycle than excess capacity.
  • As investment gain opportunities deteriorate, disciplined profitable underwriting results materialize.
  • As interest rates decrease, hard markets follow. As interest rates increase, soft markets follow.
  • Underwriting results are the key driver of the direction of return on surplus.