Insurance should be a byword for calm amid a crisis. The industry prides itself on its ability to cope with the worst of times.

But executives in the specialist insurance market are starting to face an emergency of their own. Tempers are fraying, business plans are being rewritten and regulators are getting worried as a problem that has been building for years starts to bite into profits.

What the industry calls a “soft market” — a period of falling prices — has been going on for five years in the specialist insurance and reinsurance sector. Hopes of an upturn have been dashed time and again.

Those at the top of the industry are worried. In her midyear message late last month, Inga Beale, chief executive of Lloyd’s of London, warned that the home of British insurance was “expecting the market [to] shrink this year and next”.

Insurers, she said, “must exercise strong underwriting discipline, improve efficiency and reduce costs”.

James Few, global managing director of reinsurance at MS Amlin, says rates for some types of reinsurance — particularly property-related policies — have fallen 40 per cent over the past five years.

“Prices are still declining and the level we have reached is not attractive,” he says.

Industry veteran Stephen Catlin, in a forthcoming book called Risk & Reward, says “insurers find themselves in a marketplace where the level of pricing is close to unsustainable”.

One reason for the low prices is a lack of the sort of large claims that tend to drive prices up. The last year of big natural catastrophe claims was 2011, when there were earthquakes in Japan and New Zealand.

Added to that has been an influx of capital competing directly with traditional reinsurers. Investors have been pouring money into investment vehicles called Insurance Linked Securities (ILS) in search of better returns than they can find elsewhere.

According to broker Aon Benfield, the amount of capital deployed in ILS vehicles grew 13 per cent to $81bn last year. That is more than three times higher than there was five years ago.

“Supply has been growing faster than demand and that can only mean one thing for pricing,” says Neil Maidment, chief underwriting officer at insurer Beazley.

Insurers are at least still profitable. According to Willis Re, part of broker Willis Towers Watson, reinsurers reported a return on equity (ROE) of 8 per cent last year. But James Vickers, chairman of Willis Re International, says that is not the whole picture.

“The heart of the problem is that the way insurers report results does not reflect the underlying performance,” he says.

According to Willis Re, after stripping out the effect of reserve releases and abnormally low natural catastrophes, insurers are making an ROE of just over 3 per cent. There are worries that a severe year for natural catastrophes could push the industry into a loss.

In a speech last week, David Rule, executive director for insurance supervision of the UK Prudential Regulation Authority, warned: “Insurers may be underestimating risks, particularly on new business. For example, they may be too sanguine about catastrophe risks, such as significant weather events.”

The pressure is starting to show. Insurers complain that brokers are taking more than their share of the pie by increasing commissions and introducing added charges.

Evan Greenberg, chief executive of insurer Chubb, used this year’s annual report to attack what he called “abusive behaviour” from the brokers, warning that “these predatory behaviours . . . are simply unsustainable from an underwriting perspective”.

And the brokers have hit back. On a results call in April, Dan Glaser, chief executive of broker Marsh & McLennan, said: “Most trusted advisers and carriers can be commoditised and disintermediated if they become complacent.”

Beyond the rhetoric, some in the industry are taking action. Cost-cutting is becoming more common — Lloyd’s, for example, is losing 70-80 jobs, or 10 per cent of its London workforce.

Paris Hadjiantonis, analyst at Credit Suisse, says there could be more to come across the industry. “There is not really any material rationalisation yet, but it could happen if we start to see large [catastrophe] events that will drive underwriting losses.”

Insurers are also changing their business plans. Some are getting out of the worst-hit parts of the market, and expanding in more promising, higher growth areas such as cyber insurance.

Others are trying to keep hold of their customers by offering more generous coverage. “People want to maintain premium volume so we see parts of the market where conditions are being expanded,” says Mr Maidment. “In reinsurance for example, people are offering more multiyear deals.”

The outlook for the more traditional lines of business remains depressed. Property reinsurance prices fell by as much as 10 per cent in the July renewals season for example, according to Willis Towers Watson.

A long hoped-for upturn in the market has not yet arrived and some in the industry doubt it ever will. While there is always potential for big claims to eat up some of the industry’s capital, there is more waiting on the sidelines to come in. Now that pension funds and other investors have got a taste for insurance risk, many believe that they will continue to pour money in, keeping prices low — and profits down — for years.

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