After three buoyant years in the underwriting cycle a re-balancing process is underway for global property business says Jon Foley

The huge losses sustained by property insurers and their reinsurers as a result of the terrorist acts on 11 September caused a significant spike in insurance pricing and wholesale restrictions in cover. This followed several years of poor soft market underwriting.

The profits made, and predicted to be made, by carriers writing global property business for the period 2002 to 2004 are welcome, but unsustainable.

The capacity crunch is over, and the enviable returns achieved by those underwriting through the hard market cycle have led to an over-supply of capital and a softening in rates and conditions.


2004 was the correction year for most of Ascot's client base. It has offered or supported reductions in premium spend to many key clients, and, as a result, will reduce its predicted underwriting margin. The reduction in terms has come in advance of any meaningful softening in the reinsurance market.

After 2004's correction underwriting discipline must prevail. Ascot will not follow a trend leading back to the soft market underwriting of the late 1990s when rates and deductibles gave underwriters scant chance of returning a profit. It has developed a sophisticated model to monitor its renewal terms, focusing not just on pure rate, but also on conditions, deductibles and acquisition costs. Only by truly understanding the affect of a softening market on our retained net premium can we hope to offer a competitive and sufficiently profitable product.

But rate and conditions were not the only cause of the unprecedented underwriting results for 2002 to 2004. The period of hard market conditions coincided with a period of relatively benign loss activity. Equally, a relative absence of significant risk losses at a time when increased client retentions had removed most loss attrition has led to excellent profitability.

As deductibles come under pressure again this will, in many cases lead to a restructure of our capacity on programmes.


The hurricane season of 2004 served as a timely reminder of the huge potential for loss in the market. While none were truly significant in their own right, the aggregate affect of four landfall hurricanes in Florida over a six week period has hit direct insurers' net retentions hard and brought to an end the period of riding our luck. With a well-documented prediction of a more active than average hurricane season for 2005 to follow, underwriters should look to retain sufficient margin to cover increased catastrophe losses. The most active typhoon season in Japan in living memory in 2004 and a Tokyo earthquake in July 2005, also serve to remind us that significant loss is not confined solely to the US.

The world economy adds further pressure to our underwriting profitability.

Driven by the rise of China as an industrial superpower and political uncertainty in the Gulf, commodity prices are generally high - most notably in the key industrial raw materials of oil, coal, steel and copper. This has the dual effect of increasing business interruption exposures while reducing the value of monetary deductibles, and further adding an inflationary pressure to reconstruction costs. As a result, the potential for claims inflation is real and a further, less visible, reduction in rate is thus an inevitable outcome.

For the remaining months of 2005 and in the absence of significant risk or catastrophe losses, the prediction is for reductions in rate continuing in the range of 10-15% for our best assureds. Ascot will carefully consider broadening in coverage and increases in some sub-limits where specific needs arise and can be justifiably underwritten. It will resist erosion of retentions where loss frequency is a likely outcome.

New business will continue to flow into the London market. While retention of our core renewal book will be key to sustained profitability, we must be mindful of replacing or diluting our proven renewal book with new business at worse terms.

- Jon Foley is senior underwriter at Ascot Underwriting.