A rising tide carries all boats. That rings true currently in commercial insurance. Carriers have broadly brushed aside concerns about geopolitics, inflation and natural catastrophes and reported positive 2022 underwriting results. Leaders talk optimistically of the pivot to growth and the viability of “writing the market” at present terms.

Executive Summary

Although rates are hard, combined ratios and returns on required capital are still underwhelming. Here, Tony Buckle and John Carolin, partners at UWX, and Mehmet Ogut, director, Deloitte Consulting, examine the conundrum—and a related disconnect between underwriters and actuaries as well. They suggest that underwriting discipline actually isn't improving. There are growing losses in the market, while attention is being drawn to top-line growth. Underwriters need to look at exposures and take actions to tighten coverage, proactively aligning with reserving actuaries to ensure agreement on how such changes impact ultimate loss ratio calculations.

And yet…after five years of substantial price increases across commercial insurance, combined ratios in the low to mid-90s feels underwhelming. Q1 results too are a mixed bag. Why is all that payback from insurance buyers not translating into significantly better combined ratios and returns on required capital for insurers?

At one level, the answer is that the market is playing catch-up. It is now clear that across the market, risks were technically underpriced at the nadir of the soft market in 2017. It is also clear that the market had underestimated—even missed—how underlying exposures were changing, and not just in natural catastrophe insurance. For example, the market failed to recognize how litigation funding was transforming the public D&O landscape.

It is increasingly evident that both underwriters and reserving actuaries significantly underestimated the ultimate loss ratios of the business they were accepting, relying on historic loss picks that did not reflect the new reality.

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