July 26, 2023

The Underwriting Lifecycle

Insights

Underwriting

Paul Ingrey, former Arch director and board chairman, created an “Insurance Clock” to help measure the insurance underwriting cycle. More than three decades later, this same insurance clock still holds merit.

Creating shareholder value through the insurance cycle has been central to the company’s management philosophy since Arch was established in 2001. That is, we don’t chase unprofitable business in soft markets, but we do write more business as attractive opportunities arise in hard markets. Ingrey, who was a director of Arch when the company was founded, created this insurance clock that we reference to understand the entire underwriting lifecycle and use as one measure of our risk appetite.

Infographic of Paul Ingrey's Insurance "clock."

Paul Ingrey’s Underwriting Cycle Clock

Download Insurance Underwriting Clock PDF

Text Version of Paul Ingrey’s Insurance Underwriting Clock

Paul Ingrey was a founding member, Chairman and Director of Arch Capital Group Ltd. In 1985, as president of F&G Re, he created this clock to help measure the insurance underwriting cycle.

[Around the outside of the round clock, beginning at the top:]

Variables:

Insolvencies—Domino potential
Stock (Bond) market
Chronic Under-reserving
Foreign exchange rates
Catastrophes
Interest rates
Inflation

[Arranged as numbers on a clock:]

Reinsurance rampant, support anything.
Underwriting “pens” and MGAs thrive.
Special risk underwriters move into standard lines.
Few questions asked.
Pricing starts to drop.

Companies compete to pay producers more commission.
Invent new programs and marketing ideas.
Forms broaden.
Prices drop significantly.
Companies feel the need to preserve/increase market share.
Buyers happy.

Prices fall dramatically.
Profits level off — most come from investments and investment income.
Producers provide little underwriting info/little is required.

Profits slide.
Investment income barely covers underwriting losses.
Pricing totally unrealistic.
Forms wide open.
R.I.F. companies cut staff 10%.
Cash flow from operations turns negative.

Results horrible.
Underwriting losses begin to exceed investment income.
Companies sell off assets—take capital gains, etc.
Companies (and producers) cut budgets—move to control wages and other benefits.
Move bond portfolios to taxable basis.

Equity value of companies rises based upon future expectations.
Pricing cannot go lower—does not improve.
Pull back “pens” MGAs lose fronts.
“Go back to basics” of underwriting.
Producers become alarmed.
Foreign capacity withdraws from U.S.—due to catastrophe or casualty losses.

A.M. Best Co. writes this decade’s “letter of concern” on the state of the insurance business.
Companies sell additional shares in equity market.
Companies cancel agents based upon statistics and ranking in agency.
A few special risk underwriters emerge.
Agents plead for stability.

CRUNCH!
Capacity crisis—written premium restrictions—risk capacity scarce.
Availability problem as prices rise!
Surplus restricts growth.
Forms tighten.
Reinsurance supply shrinks.
Buyers unhappy.

Prices up sharply.
Results still poor.
Combined ratios begin to improve.
Special risk products in great demand.
Fear of insolvencies.
Guaranty funds?

Capacity becomes expensive.
Companies ISO rates.
Prices up again.
Surplus lines flourish.
Cash flow exceeds underwriting losses.

All companies flourish.
Tax losses recovered, earnings multiplied.
Combined ratio profit.
Companies add to IBNR and case reserves.
Equity prices begin to peak out.

EUPHORIA!
Producers happy.
Prices stop rising.
Companies open new lines of business.
Hire new people to provide support.

[Inside the circle, toward its center and beginning at the top:]

ROI peaks out.
Companies use cheaper facultative to create better net pricing.
ROI Sinks.
[Pause.]
[Pause.]
[Pause.]
More Captive and self-insurance programs formed.
[Pause.]

This article originally appeared on the website on March 12, 2020.