The true test of underwriting discipline will be how companies behave as rates continue to soften

There is a strong sense that the reinsurance industry has become more professional. Many commentators point to the greater use of both risk and financial modelling, allowing reinsurers to get a better handle on the exposures they are assuming and the type and amount of capital they need to hold against them.

Executives extol the virtues of underwriting discipline and turning business down if pricing does not meet rigorous standards. Some have credited the lack of price increases after the heavy first-half catastrophe losses as testament to the industry’s pricing prowess.

Others go so far as to suggest that the boom and bust days are over, and that the high-profile failures seen in recent history are things of the past.

Despite all the positive noises, however, reinsurance underwriters continue to be at the mercy of the pricing cycle. Reinsurance executives express concern about the generally softening rates across the industry, but they seem powerless to stop the downward slide.

The most common response to the question of what it will take to stabilise or harden rates is: “a large catastrophe or series of events”.

There can be little doubt that underwriting techniques and quality have improved. Catastrophe modelling alone continues to make huge advances. And the top-line reductions at some companies shows that executives are not just talking about spurning unprofitable business. But the true test will be how companies behave as rates continue to soften. The industry has enjoyed generally hard pricing since 2001, and a truly soft market is a distant memory for many.

Perhaps the reinsurance industry should only describe itself as professional when the prices it charges are governed by its assessment of the risks being assumed, rather than external pressures.

Ben Dyson, assistant editor, Global Reinsurance