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Carrier cash flow predicts price swings
Soft markets have sometimes lined up with soft economies, but the two are not perfectly correlated. The best predictor is the carriers' profitability: net income and cash flow, rather than revenue. While cash flow is positive, carriers are happy and generating returns. When it dips negative, they have to push rates up to drive returns, and the market hardens.
Picture an earthquake in California and a hurricane in Florida in the worst economy in the world. Prices go up, and the brokers make more money, because they get a percentage of that premium.
In a soft market, premiums come down for several years, and so do commissions. Growth slows and cash flow generation takes a hit. Tuck-in acquisitions probably get a little cheaper in those years.
Why do insurance prices move in cycles?
High prices attract new capital to insurance. More capital means more competition, and carriers cut prices to win business. Eventually prices fall below what claims cost, losses mount, and capital leaves. Prices then rise again, and the loop repeats. Industry analysts call this pattern the underwriting cycle.
Why can carriers lose on underwriting and survive?
Carriers collect premiums up front and pay claims later, and they invest the money in between. That investment income can offset underwriting losses. A carrier's underwriting result is often summarized by the combined ratio, which is claims and expenses divided by premium. A combined ratio above 100 percent means a carrier paid out more than it collected in premium.
How do catastrophes reshape insurance prices?
Carriers buy reinsurance, which is insurance for insurers, and big disasters raise its price. Those higher costs flow through to what customers pay for coverage. Catastrophe models, which simulate storms against portfolios of insured property, shape how carriers set rates. Hurricane Andrew in 1992 pushed the industry to adopt those models and drove several Florida insurers into insolvency.
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