View from City Road: The changing insurance market

After catastrophic lurches from profit to loss in the insurance market over the past two decades, will this cycle of boom and bust be any different? The results from Royal, General Accident and Commercial Union certainly suggest that the upswing is behaving in a novel fashion.

Motor and household premium increases are peaking much earlier than in past cycles as profitability - and competition - come back faster than usual. Consumers have been paying for the rapid rise in profitability, but the worst of the pain on rates is now over.

As this recovery is from an exceptionally tough downturn, where losses have been compounded by novelties such as the effect on mortgage indemnity policies of falling house prices, those with long memories might expect another roller-coaster. The faster they rise, the harder they fall.

One reason it may not happen is that insurance companies were overloaded with capital in the heady days of the 1980s and could afford to bid for market share at any price. With capital now in relatively short supply, despite rights issues, the companies have no such luxury in the 1990s.

What has been regarded as a problem could therefore be a source of future stability. Insurers cannot afford to be too aggressive on price or bid heedlessly for market share at the expense of profits.

The insurance market has also become more efficient. There are new competitors, such as Direct Line and others selling straight to their public. Some of the sclerotic giants of the industry have also had such a fright that their own internal control and pricing systems have been revolutionised.

Their pricing is reacting much faster to changes in the market place, a development some believe will make future cycles smaller, though perhaps more erratic.

In the short term much of this optimism is already reflected in share prices. The best bets are those with furthest still to go in improving themselves, such as Royal Insurance.