It's time for the market to take control, says Elliot Lane

' AXA acting underwriting director Roy Watkinson said this week that the underwriting cycle had been "softer and deeper" than expected, but that it was now scraping the bottom and could not go further.

Hitting pay dirt in this market will be hard in 2005. Brokers across the industry are feeling the pinch and it will be a testing year.

For insurers, claims costs are still rising, with the compensation culture alive and well. You can't trust anyone. The latest emerging risk has hit the pet insurance world, where vets are inflating the fees of Tiddles' hernia operation and Rover's plaster cast.

Is nothing sacred?

Staying with animals, the underwriting cycle is like the gorilla in the room - difficult to tame and overshadowing everything else.

Any investment observer will ask how an industry that re-prices 95% of its products every 12 months can suffer such acute cycles. And why can't the market keep control and plan ahead for products that are long-term?

Two things are fundamental.

Insurers are still slaves to finite amounts of underwriting capital. During a hard market, some underwriters spend like a Russian billionaire in the Premiership and then holiday on the excessive rates at the client's expense. They never plan for a rainy day, when the downpour causes a slide into the trough.

Leading to the second point - discipline. 18 months ago Allianz Cornhill's chief executive Andrew Torrance said the market wasn't softening, although brokers bemoaned that it was Allianz underwriters who were cutting rates. Norwich Union offices compete against each other when its board promotes restraint.

Royal and SunAlliance's outgoing UK chief executive Duncan Boyle seems to have kept his underwriters in line and steered the supertanker away from the rocks. But the firm's shareholder value remains poor and, like many other insurers, trying to beat the direct writers and banks on expense ratio is a major challenge. IT