U.K. regulator still concerned about discipline

Many U.K. insurance companies talk a better game than they play when it comes to disciplined underwriting, according to a regulator.

Sarah Wilson, director and insurance sector leader, at the London-based Financial Services Authority told delegates at an event hosted by London law firm Barlow Lyde & Gilbert L.L.P., that the regulator is generally pleased with the strides made with risk management in the U.K. insurance industry.

But she said the FSA remains concerned about the apparent inability of some firms to cope with the underwriting cycle.

"In our view a well-managed insurer or reinsurer will set a risk appetite and manage itself such that it writes business which - at all points in the cycle - conforms to that risk appetite. Such an approach is entirely consistent with the continued existence of the cycle - indeed we understand the economic factors which drive it, and also understand that there may be strategic reasons why firms - consistent with their risk appetite - may wish to write business which is loss-making in the short term," she said.

"But it requires a disciplined and well managed environment to achieve such an outcome - one where senior management pay attention to underwriters' incentives and put in place appropriate controls around both pricing models, and terms and conditions. Unsurprisingly, most people talk a good game in this area, and some are happy to point the finger elsewhere. And yet, in certain classes of business, notably professional indemnity and aviation, we have recently seen the market driven down towards levels that most informed commentators believe to be unsustainable," continued Ms. Wilson.

The regulator said that the FSA is not convinced that that this is "entirely caused by unscrupulous brokers taking advantage of naïve capacity". Ms. Wilson reminded insurers that they need to continue to act "responsibly in order for the worst excesses of the past not to be repeated."

"Most firms have documented their risk appetite, but there remains a substantial gap between defining and applying that risk appetite in practice. We shall continue to challenge firms in this area, and to look for evidence of the application in practice of the discipline that firms are keen to espouse," said Ms. Wilson.