One of the core reasons for this happy situation is that we have not had a year with a terrible loss ratio (overall) during the past fifteen years. Of course, there has been no shortage of crises, including the Euro crisis, Grexit, Brexit, Covid, Russia/Ukraine and Ghana. But while there have been some spots of claims (notably Russia/Ukraine and Ghana), these have impacted only a handful of underwriters, and have not caused a market-wide problem in the way that the 2008 crisis did. Nor have any of these events created a real ‘hard market’.

 

One long term market participant described the situation to me as ‘fifteen years of plain sailing’, and that got me thinking. To have fifteen years, since 2010, without a really bad year (for loss ratio) seems unusual from a historical point of view. For example, look at the fifteen years before 2010, starting in 1995—the market faced sudden crisis across South East Asia in 1997, Russia in 1998, Argentina in 2001, a ‘dot com’ crash combined with the 9/11 aftermath in 2002 and the great financial crisis in 2008. These events tended to affect loss ratios across the board, and created a hard market in a way that has not happened since. Why then, did we sail through the most recent fifteen years more smoothly, when the past was so choppy?

One explanation is that the quality of underwriting has improved. This is especially the case in the single risk/structured credit market. Risk controls and access to information in this part of the market are far superior to the situation of 25 years ago. But in the whole turnover world too, (where controls and training were already well developed by the year 2000), the risk tools and quality of information have  mproved yet further.

Another explanation is the recent tendency of governments to intervene in order to protect their economies from distress. We saw this firstly in the aftermath of the great financial crisis of 2008, but also during the Euro crisis, Brexit, then during Covid, and again when energy prices spiked at the onset of the Ukraine war. These interventions have prevented a sudden rush of insolvencies and have helped protect the balance sheets of financial institutions—not only banks but credit insurers too.

However, such interventions are not without controversy. They grow the debt of countries and the balance sheets of central banks. Ultimately, the rescues are funded by the taxpayer. Some would say they have created moral hazard, as financial institutions are allowed to keep the upside of the good times, but don’t have to suffer the downside of the bad times. Others complain at ordinary taxpayers having to bail out rich bankers and insurers at a time of growing inequality. Others might respond that governments have genuinely become better at managing the economic cycle, so that ‘boom and bust’ is actually over.

Fifteen years of plain sailing does create some problems for us. Any downturn, while unpleasant, also cleanses the market, resets prices and improves policy wordings. As underwriters, we only really learn when things go badly wrong. Fifteen years is a long time to live without a major cleansing experience, and without a hard market. Many of the people who were key decision makers in the 1995 to 2010 period are retiring. Some of the main decision makers of today have not yet experienced a true loss ratio crisis across the board, or a hard market. High loss ratios occur when the intense commercial pressure to make premium over rules the voices of the more risk averse people. After fifteen years of plain sailing, it is perhaps harder than ever for voices of the risk cautious people to cut through.

The risk outlook always stays uncertain, and today’s world certainly continues to be so. Will our market continue to progress, to grow and diversify? Will it continue to sail through the next crisis in elegant calm? Can we expect that our economies will be protected by governments again next time? Is our risk management so good now that loss ratios will stay healthy for ever?

Only time will tell.

In the meantime, let’s celebrate the hard work of many very smart people who have progressed the market so far over the past fifteen years!

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About SCHUMANN

At SCHUMANN we optimise the management of risk for credit, surety, political risk insurers and export credit agencies. Our software solutions and risk models are setting the future technological standards for the industry.

We are an open minded and learning organisation which invests heavily in research and development, often with our partners at the University of Goettingen. We aim to stay ahead of the competition with our cutting edge technology.

We value our independence, and are happy to work with any data provider or partner of your choice. We favour long term partnerships. We invest all of our resources into our customer relationships, and as a result have never lost a customer in our 25 year history.

CAM Credit and Surety enables our customers to automate risk assessment and underwriting processes, while our artificial intelligence handles complex workflows with ease, enabling customers to remain compliant with their regulatory environment. 

A SCHUMANN software solution is both future proof and the most robust on the market – it will provide decades of service and will never let you down.

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Managing Directors:  Evgeny Kulyushin, Dr. Adam Melski, Dr. Martina Städtler-Schumann (CEO), Jan-Torben Schwager.