P&C National Underwriter magazine has reported that reinsurance pricing was down for the latest January 1 renewal season as global capacity has been restored to levels close to the all-time peak of December 2007.  While pricing has softened, underwriting has remained disciplined and “orderly”.

Part of the discipline seems to be due to the belief that solid underwriting results in 2009 were mostly attributable to an unusually low incidence of natural and man-made disasters, including a relatively quiet Atlantic hurricane season.  In addition, while a recovery in insurer investments has increased capital adequacy levels, it is possible that underwriters are still acting in a more risk averse manner given lingering doubts about the robustness of the financial system.

As we have discussed in the past, underwriting discipline is critical when evaluating an insurance business since companies that chase after market share in a weak pricing environment are likely to suffer significant underwriting losses over the long run.  The intelligent model used by Berkshire Hathaway insurance subsidiaries calls for rejecting risks priced at inadequate levels even if the result is a temporarily lower market share.  By following such a policy, insurers avoid large underwriting losses and are in a better position to accept adequately priced risk once hard pricing inevitably returns (usually after a series of major catastrophes).

Click on this link to read the P&C National Underwriter article.

The author owns shares of Berkshire Hathaway.

Reinsurance Pricing Softens as Capacity Nears All Time Peak
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