Anthony Hilton says insurers are keen to show underwriting discipline, but brokers say rates are falling

The chief executive of Royal & SunAlliance, Andy Haste, said over lunch a month or two back that

his company has probably been largely responsible for the collapse in insurance rates in the mid 1990s.

The company at that time had a desire to maintain market share after the merger of its two component businesses - Sun Alliance and Royal Insurance - and in doing this it led premiums downwards from 1996 onwards.

Other companies, particularly some rival American businesses recently arrived in Lloyd's were also driven by market share so joined the race to the bottom not wisely, but all too well. The result, as any who were around at the time will remember, was market mayhem.

Haste can say this because he was not in charge at the time, so carries no blame for the carnage in the market in the following few years.

He also emphasises that now he is in charge he has no interest at all in seeing history repeat itself. Whatever may happen elsewhere in the insurance industry he insists his firm is going to maintain its underwriting discipline.

This has to be the number one issue for the insurance industry. Insurance is a cyclical business and the history of the past 50 years at least has been not only that good times are invariably followed by bad, but that the up phases of the cycle seem to be getting shorter and more muted, and the down phases have become deeper and more prolonged.

The result is that the profits in the good times have not been enough to compensate for the losses in the bad times, which is why the industry as a whole has burned its way through literally billions of pounds of capital in the past 30 years.

People say it will be different this time. Lord Levene the chairman of Lloyds, and his chief executive till recently, Nick Prettejohn, have returned time and again in their speeches to exhort the industry to focus on profit not market share. They have urged companies to develop and improve their computer modelling so they know better where it is that they are making money and what risks they are taking on in return.

Rolf Tolle, Lloyd's franchise performance director, has single-handedly brought a major improvement in the quality of management in many of those syndicates where it has been painfully lacking.

There is another reason why this time will be different according to the company chief executives I meet. They say because conventional investment returns are so low companies have no choice but to focus on getting their pricing right and underwriting for profit. Gone are the days, they say, where premiums could be invested at double-digit interest rates and deliver a return big enough to rescue the underwriters from their folly. It is all much more professional now.

Capital has become more sophisticated too. People say that insurance is a very easy industry to get into and a very hard one to get out of, and perhaps the providers of capital have begun to take this on board.

Certainly the hedge funds and those providing capital on a 'sidecar' basis seem much more aware of the need to be able to exit at a time of their choosing and are trying to develop structures that will facilitate this. But we should always remember that capital flows into insurance when the returns it offers are better than the returns that can be achieved in other markets. Insurance still looks a better bet than stocks or bonds so the capital will continue to flow in and not all of it will be sufficiently discerning.

Well that is what they all say, but will it be enough? This is the industry, remember, that saw Lloyd's saved by the skin of its teeth from extinction in 1995, only to wipe out its entire capital base again barely five years later. Do we really think the insurance industry as a whole is capable of controlling its behaviour, maintaining discipline and avoiding suicidal rate-cutting wars?

Well, we are coming up to the season of conferences and meetings where such matters are debated - one hesitates to say fixed in this cartel-conscious world - and a clearer picture of where things are headed will emerge over the coming weeks. But people in the big brokers I talk to - the likes of Aon, Marsh and Willis, who between them see so much of the world's business - are deeply sceptical about the industry's ability to avoid a downturn.

Their perception is that rates are already falling across the board, in everything that is not Katrina related. In that narrow sector there remains a shortage of capacity and rates are high. Elsewhere they say the trend is unmistakably down.

Just because rates are coming down does not mean they will continue heading that way till they reach silly levels. It may be that what we are seeing is just an easing back from unsustainable peaks. It may be that discipline will be maintained and the line will be held at levels where it is still possible to make an under-writing profit. Certainly, we should hope so. But I can't really believe that it is the way to bet. IT

' Anthony Hilton is a columnist for the London Evening Standard