Letting unprofitable business go is a psychological barrier, says Moody’s in Monte Carlo

You will never remove the human element inherent in underwriting decisions, explained Dominic Simpson, vice president and senior credit officer at Moody’s Investors Service. He was speaking at the 2007 Rendez-Vous de Septembre in Monte Carlo.

The rating agency confirmed that prices were softening, although analysts acknowledged this was anecdotal and not yet apparent in reported results.

“If you look back to the end of the 1990s,” explained Ted Collins, group managing director, “the consensus would have been that prices were bad but reported results were good. Once reported results look bad it tends to precipitate price movement.”

If this year’s hurricane season is relatively benign Moody’s expects to see a further weakening of rates – but only marginally for US property catastrophe. “We don’t expect US cat rates to go into free fall because after Katrina the perception of the risk changed,” explained Simpson.

The advice, as always, is for disciplined underwriting. Simpson voiced concern that historically discipline tends to slip as capital builds up in the market.

The difference now however, the analysts noted, was new pressure from investors and activist shareholders forcing greater attention to bottom line results. Management also have improved quantitative tools at their disposal and boards are getting more involved in ERM and catastrophe risk management.

Pressure from capital markets and equity investors to focus on bottom line results and underwriting discipline. There are also plenty of quantitative tools around for management now – boards are getting more involved in ERM and catastrophe risk management.

Lots of capital in the market now and prices are coming down. We may start to see things slip with terms and conditions and pricing

Asked about the impact of the subprime crisis in the US on the reputation of rating agencies, the analysts refused to comment. In terms of the impact on the industry they were confident it would not have any lasting effect – although they could be second order effects. “It illustrates the lack of correlation between the insurance and capital markets,” added Simpson.

The continued pressure to diversify was also on the agenda – and M&A is likely to continue to be a favoured method of achieving that.

“If the question is would we expect to see M&A activity to increase over the next 12 months the answer would be ‘yes’,” said Simpson.

“The main lines of business are relatively mature and therefore gaining organic growth will be a challenge – one way of addressing that is through a bolt-on acquisition.”

Diversification into new geographies such as the Middle East and Soviet Union, he added, could help to offset the drop in premiums in other jurisdictions.