Survey reveals that insurers are underestimating the scale of the rates decline.

The market is set to soften even further, and insurers lack the tools to properly monitor the cycle, according to the latest market survey by Ernst & Young (E&Y).

Three out of four respondents to The Price is Right? Technical pricing and rate monitoring in a softening market, said their organisations would benefit from improvements to technical pricing and rate monitoring processes.

And 73% believed they would underestimate the magnitude of rate declines as the cycle trends down.

The survey polled 15 of the largest London market insurers, most of whom believed the market had the potential to soften further.

“Rate reductions so far have been in terms of price; pure price rather than terms and conditions,” said Mike Barkham, E&Y partner and leader of its property and casualty actuarial practice.

“However, we are starting to see terms and conditions opened up now, and multi-year contracts are one way of doing this, particularly in the energy and D&O markets. Exclusions that were in place are now no longer in place.”

Respondents to the survey said changes in policy terms and conditions represented the biggest barrier to effective rate monitoring, followed closely by inaccurate and incomplete exposure data, and lack of data for new business.

“The usual trend is that as the market softens, data gets worse,” added Barkham. “But our respondents said that at the present point in the cycle, they did not feel data was getting worse, which surprised us.

“This may be because the market is more disciplined than in previous soft cycles, or it may be that the trend will be observed as the market softens further.”

Those surveyed were divided in the alacrity of their rate monitoring process, ranging from a monthly analysis to an overnight analysis.

“I’m not sure how much the market moves in a week, or even a month, but day-to-day data capture could be improved,” said Barkham.

Meanwhile, Stewart Mitchell, E&Y senior manager, said insurers’ tendency to concede to rate reductions was not dependent on the size of the company or its desire to increase income.

He added that the current economic environment – including the spectre of inflation - could exacerbate the cycle