If insurers can't stop the rot who can?

Much is being written about underwriting discipline, or lack of it, at the moment. This is with some justification although it is my personal experience that any lack of discipline seems to be centred mainly in the large corporate arena rather than anywhere else.

That is not to forget the embarrassing premium grab going on for motor insurance at the moment, despite continuing under-pricing and claims inflation.

It is true that rates have declined overall for the past 12-18 months, but it has been a much softer landing than in previous cycles - so far anyway. This may be due, in part, to low inflation, the uncertainty of the times we live in and no doubt the pressure and impatience of the financial markets in an industry that has historically shot itself in the foot every few years. What is worrying is that, despite the market having softened months, it may not be the end.

One analyst told me that rates will probably start increasing in the third quarter of next year when insurers start seeing the results of what they have been doing for the past 12-18 months.

This time lag means that the profits being shown now do not reflect current business practice and probably mask worse results to come. This is not news surely - we have seen it so many times before.

Where real stupidity has won through and where the discipline in underwriting has been most lax has been in the large corporate arena. We recently lost a seven figure premium client to a national broker for less than 35% of the market rate.

This quotation, we believe offered up with scant detail, was based on the total claims for the past three years being less than the quoted future annual premium. When it transpired that the claims totalled three times the estimate, guess what - the quote stood!

That's not underwriting, this is buying in top line growth and in this case at a loss.

All of us have examples of where insurers quote less than burning cost, where a quotation has been desk-topped, where size of account rather than profitability of account comes first. My frustration is that it happens cycle after cycle regardless of what the various industry leaders state.

When will insurance companies learn that the poor reputation we have is, in part anyway, deserved. This is despite the very public desire of all our industries leading figures, quite rightly, to educate consumers as to the very real benefit insurance brings to their lives.

What other overhead for businesses fluctuates quite as dramatically each year as insurance? What message do we give out when one year we tell clients of increased prices due to claims inflation, uncertain times and of the increasingly litigious society we live in to then, within 24 months, show very significant price reductions, three-year deals, retroactive no claims discounts etc.

Loyalty to brokers and insurers alike is lost as are the reputations built up over the years the risk has been held.

What is frustrating is that if any blame does attach, and I would personally put the blame squarely at the insurers, brokers are charged with being the culprits.

If you are a broker with a big case under competition, as much as you may want the client to remain with the existing insurers, for continuity, for a better deal, for very good reasons, a market exercise for price reasons alone is sometimes inevitable, especially if under competition - 20% commission on a lapsed case does not pay the bills.

The most frustrating thing for me is that, in running a relatively unique broker, which is proudly provincial but with a branch and its head office in the City, I have been very privileged to meet some of the senior management of insurers and brokers alike.

Despite their apparent ability to be able to do something about this situation they seem to be just as much at a loss over the market as we are.

If that is the case, and this cycle has been going on as long as insurance has been offered, we may have to learn to grin and bear it and realise that, however much both our clients and ourselves desire pricing stability it is simply not on offer.

What is more upsetting is that if this is true then the desire for a better reputation becomes, to my mind, an impossible task.

Rumours abound that the FSA may take an interest in pricing - I doubt it. It is surely way beyond the regulator's remit to look at pricing other than to ensure the solvency of any insurer. Pricing, in its most basic form, is after all, the right of the supplier of any product, however short-sighted they can sometimes be in setting it.

If insurers want the better reputation they desperately seek then I am afraid they will have to earn it and that means more than simply settling claims. IT

' Stuart Reid is managing director of Stuart Alexander