“Its so easy for capacity to come into the market and capacity to come out of the market. The supply side of capacity is so volatile within aviation insurance that this seems to lead to a very exaggerated business cycle,” he said.

The fact that rates went up so dramatically after Sept. 11, 2001, has rapidly attracted capacity back into the market, and the actual financial losses of the last 12 months in aviation insurance have not been significant, he noted. “That combination helps to fuel confidence or business appetite in the market,” he said.

He admitted that its depressing for underwriters, but an inevitable fact of life. Yes, but

Following the precipitous rise in rates after Sept. 11, there were reports that some risks had seen reductions of 20 percent during last autumns renewals. Consider this: although 2002 was a good year for aviation underwriters with improved rates, during the 1990s the worldwide aviation market reported an average hull and liability combined loss of $1.5 billion for each year. If I were a manager at an aviation insurer, or a shareholder with a company that did aviation business, I would find this an unacceptable state of affairs.

This is a symptom of the systemic problem plaguing the insurance industry. (Think of Godzillas foot looming above us.) Boom-and-bust is discouraged in the economy. Why is it accepted as a fact of life in the insurance industry? Why isnt insurance a valued service, rather than just a commodity like pork bellies, grain or oil?

The industry devalues itself by commoditizing its services, and by participating in boom-and-bust cycles. By habitually charging prices below the cost of risk, then reacting with violent rate increases and market exits when the inevitable “adjustment” occurs, insurance becomes a commodity to the public and to corporate buyers.

Think of the saying: “You get what you pay for,” or the early slogan from LOreal, which touted products that cost more “because youre worth it.” Then there are the Stella Artois ads, which remind us their beer is “reassuringly expensive.” These companies say their products are valuable, so we must pay a little more for them. Insurers and reinsurers need consistent, stable rates to bring up their ratings and become Jaguars rather than Edsels; Dom Perignon rather than cheap sparkling wine.

Its a risky world, highlighted aptly by Sept. 11 and the ever rising costs of storms. Godzilla is the predatory claimants bar, tireless in its quest for old and new deep pockets. Godzilla is the next liability crisis, no doubt now spawning its demon seed: Electromagnetic fields? Mobile phones? Genetically modified foods? Who knows what else is on the horizon?

Im not an actuary, but should rates really drop precipitously again? Yes, they can, I knowbut should they? Disabuse me, please, dear readers.

I know, many people are saying its different this time–the industry has learned its lesson, finally. But theres that persistent talk about rates softening, evidenced by aviation and by a recent report from Aon, which said there is a moderating trend in property rates as “insurers compromise to meet their target levels of premium growth.”

First-quarter figures from the Insurance Services Office Inc. and the National Association of Independent Insurers, as well as the Reinsurance Association of America, show improvements, but there is still a very long way to go before underwriting profits are made on a consistent basis.

Jersey City, N.J.-based ISO and NAII in Des Plaines, Ill., reported that property-casualty insurers in the United States had a first-quarter combined ratio of 99.5, compared to 107.2 for the same period in 2002.

At the same time, a group of 29 U.S. p-c reinsurers reported a combined ratio of 96.4 during the quarter ended March 31, 2003, compared with a combined ratio of 101.8 reported by a similar group of reinsurers for the same period last year, according to the Washington-based RAA.

Theres certainly reason to applaud, but lets remember that money isnt made in this industry (when investment income is weak) until a company achieves a 95 combined ratio or lower. It therefore seems premature, even with improving first-quarter numbers, for rates to head south.

Repeat after me: “The cycle is not inevitable. The cycle is not inevitable.” The industry is providing a valuable service and must charge for itstable rates, year in and year out. Ive never done a price check, but I suspect a Jaguar costs just about the same every “renewal,” or theres only gradual price movements.

Imagine a decade of no insurance cycles. The public and corporate buyers will view insurance as another cost of living and a cost of doing business, like a fixed-rate mortgage. Ahhhbut Im a dreamer, a fantasist, and I watch too many movies.

Lisa S. Howard is NU's international editor and reinsurance specialist, based in London. She may be reached at l[email protected].

Reproduced from National Underwriter Edition, July 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.