In the late 1990s to 2003, we saw the effect of the third insurance cycle on our business and personal lives. During this particular trough in the insurance cycles, businesses saw drastic annual premium increases in liability insurance premiums of 40-100+%, compounded annually.
The more difficult lines of liability insurance may have seen not only large increases in premium, but a cap on the amounts of coverage available or even the unavailability of coverage for certain risks.
The lack of coverage was particularly problematic in products liability, professional liability, special-events coverage as Insurance companies were leaving certain states, discontinuing certain lines of business or going out of business.
Products we wanted were removed from the market because products-liability coverage was not available. Doctors in high-risk specialties in high-risk states were leaving those states, curtailing certain activities such as delivering babies or retiring early.
The unavailability of insurance for high-risk activities or the escalations of premiums to unacceptable levels are neither unusual nor unpredictable. They are the effect of many circumstances.
A principal circumstance affecting insurance premiums and availability is the cyclical nature of insurance.
Insurance cycles are like other cycles in the economy, except that the time between peaks and troughs is not always the same as in other business cycles. Other aspects in the economy that are particularly important in affecting the severity of the cycle are the general status of the economy and rate of investment returns
As an insurance purchaser, provider or consumer, the “insurance Market Cycle” is interesting to study. It is not dissimilar to other business decision-making processes.
The accompanying chart depicts of the “Insurance Market Cycle.”
One can begin at any point in the cycle. However, an attempt to estimate where we are now would be a good beginning point.
If the cycle is viewed as a clock, we are currently between three and six oclock, the position varies depending on the line of insurance and whom one asks. In todays environment we find insurance companies courting us. They want our business.
To acquire our business they are becoming very price competitive. As we want expanded coverage for new or unique activities, we find insurance companies willing to expand coverage to meet our needs. This is unlike the previous environment.
Insurance, like other goods and services, has a cost to produce. When price is reduced to keep market share and coverage is expanded, a point is reached at which the price is less than the cost of production. The problem in some insurance lines is that the cost to produce a policy is not known for many years.
For example in products liability and professional liability a product/service provided today may not lead to a claim for two to twenty years. When do we know we collected enough premiums?
When coverage is expanded and prices reduced, the natural outcome from those events occurs; increased exposure and increased claims. When the dollars collected up front are reduced, the losses become greater.
Some insurance companies respond by withdrawal from the market other large national insurers withdraws from a line of business while another simply leave the state. In the extreme an insurer may become involvement.
After withdrawal, the market then corrects itself, and coverage narrows and premiums rise. This lowers risk and increases revenue to cover the losses. This eventually leads to increased profits.
Higher profit attracts further investment in new companies, companies that had left the market/product line return, and companies again write insurance in new lines.
This increased activity in the market increases capacity, thus supply and demand take over, and we see the competitive side of the cycle. History will repeat itself, and the cycle forces will take over.
This is an oversimplification of “Insurance Market Cycles.” certainly additional factors affect insurance companies results. These factors have existed through modern insurance cycles.
Where are we today and what can we expect? We are approaching six oclock in the cycle. Losses are increasing; insurance companies have increased claims, and they cannot sufficiently recover the difference from investment income.
Even though most businesses and individuals will find the market somewhat soft on their Jan. 1, 2008, renewals, evidence exists that this will change. The effects of the cycle may take some time to realize; however how quickly it turns depends on many circumstances.
Unless you have a crystal ball it will be challenging to determine the actual date the market will change; however, one thing is for sure – its only a matter of time.
In the late 1990s to 2003, we saw the effect of the third insurance cycle on our business and personal lives. During this particular trough in the insurance cycles, businesses saw drastic annual premium increases in liability insurance premiums of 40-100+%, compounded annually. 
