Underwriting Cycle

AAA

DEFINITION of 'Underwriting Cycle'

Fluctuations in the underwriting business over a period of time. A typical underwriting cycle spans a number of years, as market conditions for the underwriting business go from boom to bust and back to boom again.


At the beginning of the cycle, the underwriting business is soft due to increased competition and excess insurance capacity, as a result of which premiums are low. Subsequently, a natural disaster or other catastrophe that leads to a surge in insurance claims drives lesser-capitalized insurers out of business.


Decreased competition and lower insurance capacity lead to better underwriting conditions for the surviving insurers, enabling them to raise premiums and post solid earnings growth. This robust underwriting environment attracts more competitors, which gradually leads to more capacity and lower premiums, setting the stage for a repetition of the underwriting cycle.


Also known as the insurance cycle.

INVESTOPEDIA EXPLAINS 'Underwriting Cycle'

As with most business cycles, the underwriting cycle is a phenomenon that is very difficult to eliminate. In 2006, insurance giant Lloyd's of London identified managing this cycle as the top challenge facing the insurance industry and published a report by surveying more than 100 underwriters about industry issues. In response to their survey they were able to identify steps to manage the insurance cycle.


Unfortunately, the industry as a whole is not responding to the challenges the underwriting cycle brings. The underwriting cycle affects all types of insurance except life insurance, where there is enough information to minimize risk and reduce the effect of the underwriting cycle.

RELATED TERMS
  1. Premium Income

    1. In investing, income that is earned through the sale of an ...
  2. Insurance Claim

    A formal request to an insurance company asking for a payment ...
  3. Insurance Underwriter

    A financial professional that evaluates the risks of insuring ...
  4. Underwriting

    1. The process by which investment bankers raise investment capital ...
  5. Economic Cycle

    The natural fluctuation of the economy between periods of expansion ...
  6. Risk Financing

    The determination of how an organization will pay for loss events ...
Related Articles
  1. Insurance

    Understanding Your Insurance Contract

    Learn how to read one of the most important documents you own.
  2. Home & Auto

    The History Of Insurance

    The first written policy appeared in Hammurabi's Code. Find out how it evolved from there.
  3. Home & Auto

    How An Insurance Company Determines Your Premiums

    Find out how insurers use credit history to build an insurance score and how it could affect your bottom line.
  4. Insurance

    Is Insurance Underwriting Right For You?

    If you have excellent analytical skills and an eye for detail, this may be your calling.
  5. Insurance

    Life Insurance: Putting A Price On Peace Of Mind

    Would your death leave loved ones financially stranded? Find out how to ease your mind and keep them protected.
  6. Investing Basics

    Understanding Private Placement

    Private placement refers to offering and selling shares in a company to a small group of sophisticated buyers.
  7. Entrepreneurship

    JPMorgan vs. Goldman Sachs: A Tale of Two Stocks

    The performance of JPMorgan and Goldman has been impressive, but one has a slight edge.
  8. Investing

    4 Hottest IPOs in 2015

    Where is smart money headed this year? These are the most anticipated IPOs of 2015.
  9. Entrepreneurship

    Which is The Best Bank for Your Buck, BAC or MS?

    One things stands out between these financial services giants when it comes to investing in them.
  10. Investing

    What's Investment Banking?

    An investment bank is a special type of bank involved in a variety of large and complex financial services for major institutions.

You May Also Like

Hot Definitions
  1. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  2. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  3. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  4. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  5. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  6. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
Trading Center