Insurance cycle
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Insurance Cycle is a term describing the tendency of the insurance industry to swing between profitable and unprofitable periods over time is commonly known as the underwriting or insurance cycle.
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The underwriting cycle is the tendency of property and casualty insurance premiums, profits, and availability of coverage to rise and fall with some regularity over time. A cycle begins when insurers tighten their underwriting standards and sharply raise premiums after a period of severe underwriting losses or negative shocks to capital (e.g., investment losses). Stricter standards and higher premium rates lead to an increase in profits and accumulation of capital. The increase in underwriting capacity increases competition, which in turn drives premium rates down and relaxes underwriting standards, thereby causing underwriting losses and setting the stage for the cycle to begin again.[1] For example, Lloyd's Franchise Performance Director Rolf Tolle stated in 2007 that "mitigating the insurance cycle was the "biggest challenge" facing managing agents in the next few years".[2]
All industries experience business cycles of growth and decline, 'boom and bust'. These cycles are particularly important in the insurance and reinsurance industry as they are especially unpredictable. The Insurance Cycle affects all areas of insurance except life insurance, where there is enough data and a large base of similar risks (i.e., people) to accurately predict claims, and therefore minimise the risk that the cycle poses to business.