Everyone knows the old saw about the broken clock being right twice a day. Most readers are also familiar with the “underwriting clock” which shows the pattern of the insurance pricing cycle.

Unfortunately, most insurance CEO’s version of the underwriting clock broke long ago somewhere around 8:30. They perpetually think we are on the verge of higher pricing. 2005…2008…2011…2017.

Every time there is a significant loss they jump straight to 8:30 and declare an imminent pricing turn. Then, a few months later when said turn fails to materialize, they check the back of the clock and realize it was out of batteries again.

And guess what? They’re back at it againthe Covid fallout is going to cause a global pricing turn!!! Are we sure about that?

Necessary Vs. Sufficient Conditions

Dedicated readers will recall my prior thesis on what drives a pricing cycle. It is the confluence of necessary and sufficient conditions. The necessary conditions are a big loss event and a withdrawal of capacity. The sufficient condition is fear, meaning an unwillingness of major market participants to write new business.

If we look back to some of the prior failed predictions, they all had significant losses and, at times, a reduction in capacity, but they lacked the fear element so sufficient capital was deployed to mute the pricing response.

So where are we today?

Presence of Losses? Mixed

A typical broken clock fake market turn starts with a bidding war by insurance executives and underwriters to see who can come up with the highest possible industry loss. Do I hear $25B? Can I get $40B? I have $40, can I get $50? $50 from the Insider. Can I get $75?

The estimates inevitably end up being too high. Already we have seen Covid estimates creep from $25 to $40 to $50 and even $100B! Nobody is willing to consider that the actual answer might be closer to $0!

Wait, what? Yes, it might be $0. The one big thing here that is different from a normal cat is there are positive offsets. So, yes, there could be a gross loss of $50B or more. However, there may be positive offsets in the tens of billions due to lower exposure in workers’ comp, liability, fire losses, and obviously auto (even including the premium rebates).

If you write a broad portfolio of business, your overall CR may not be impacted much at all. Certainly if you are a specialist say at Lloyd’s writing event cancellation, D&F, aviation, and energy you are going to see a fair amount of losses along with disappearing premium. However, not everyone is in that boat.

Absence of Capacity? Sorta

Most of the broken clocks failed as soon as underwriters realized new capital was being raised (either by startups or ILS investors) that crushed the upside before it began. The new capital essentially took the batteries out of the clock.

The one positive this time around is ILS capacity has been burned and is retrenching. There is also some panic in the retro community. That is all good for cat pricing and the repercussions are already being felt in the Florida market.

However, there isn’t an obvious reason for capacity retrenchment in other lines of business. In fact, there is giant excess capacity in places like energy or aviation where exposure has declined drastically so there is the same amount of capacity chasing a lot less premium. In core lines like comp or GL, it’s hard to see any reason for appetite to change.

Presence of Fear? Absent

The simplest way to measure fear is when companies exit lines of business. After 9/11, nobody would write terrorism. When med mal went bad, giant parts of the market ran away and never came back. D&O writers cut back dramatically post the tech bubble.

Nobody is talking about exiting commercial property because they fear future virus claims. Everyone seems convinced their virus exclusions will not only hold for their in force, but for future claims as well! That is far from fear.

Imagine a situation where a liberal judge overturns a virus exclusion. It gets overturned on appeal, but legislators then step in to broker a compromise. The outcome is no BI for past claims, but no exclusions going forward. The Feds offer a TRIA like backstop for the worst case, but there is still a very large cat residing under the retention.

That isn’t an unimaginable scenario. Yet nobody is exiting property out of fear of it. Nobody is exiting GL out of fear over return to work lawsuits (if employers can’t keep their workplaces virus free). There is no fear.

Need more proof? We already have “offensive” capital raises in London. There will surely be more to follow. Markets turn on panic capital raises. Markets turn when newcos form after existing ones are impaired, not when rumors of startups begin before any company has experienced any real pain. There is no fear!

Verdict: Change the Batteries

This will be a moderate event for the industry. Losses aren’t that significant in the grand scheme of things. Most of the investment losses have already recovered. Pricing will improve in cat and some other lines that were already under stress (e.g. D&O). This is not 2002. It’s not even 2005.

It’s possible it could get there, but it’s going to take something worse than we’ve seen so far. And if you believe that is imminent, well, then you should probably be writing less business at today’s prices, not more.