Are we seeing an end to insurance market cycles?
In commercial insurance - particularly workers comp - hard and soft market cycles have been almost a law of nature. While not quite as predictable, they rise and fall like the tides. But is the “what goes up must come down” mentality of insurance market cycles becoming obsolete? Bret Shroyer makes that case in his post at Insurance Thought Leadership: Are Market Cycles Finally Ending?
Shroyer examines traditional market cycles. Conventional wisdom has long held that "market cycles are a result of prices moving in reaction to changes in loss ratio" - but he demonstrates via a workers comp graph that, "all of the cycles in the market are the result of just one thing: price movement." In other words, any havoc wreaked by extreme market cycles has been largely self-inflicted.
The game changer going forward? Predictive analytics, which allow for more sophisticated pricing.
"The “what goes up must come down” mentality of market cycles is becoming obsolete. We see now that market cycles are fed by pricing inefficiency, and more carriers are making pricing decisions based on individual risks, rather than reacting to broader market trends. Of course, when we use the terms “sophisticated pricing” and “individual risk,” what we’re really talking about is the effective use of predictive analytics in risk selection and pricing."
While Shroyer notes that "cycles aren’t going to ever truly die," he discusses the impact of predictive anyalytics, suggesting that with their use, "market cycles present an opportunity to increase profitability, regardless of cycle direction."