A recent analysis from PwC suggests the London Market enters the next phase of the underwriting cycle from a stronger position than in the previous soft cycle, supported by significant hard market pricing gains, higher investment returns and improved expense ratios.
Ahead of the annual Monte Carlo Rendez-Vous de Septembre (RVS), PwC UK has modelled an illustrative softening cycle through to 2030.
The firm stressed that this stronger starting point does not remove the potential for material margin erosion as competition intensifies.
PwC expects meaningful further softening, but not a repeat of the previous soft market’s depth. Pricing headroom remains, but return economics should increasingly constrain further reductions as that headroom is consumed.
The analysis noted that the current soft market does not have to repeat the underwriting losses of the previous cycle. However, maintaining healthy margins will depend on the resilience of underlying underwriting performance as pricing falls, with erosion potentially taking the market back towards underwriting breakeven.
PwC’s modelling suggested underwriting discipline could be worth up to seven points of return on capital, underscoring the importance of maintaining discipline as the market softens.
The challenge will be where firms choose to compete, when returns no longer justify deploying capacity and how quickly portfolios are reshaped in response.
Outperformance is likely to depend on whether the discipline built during the hard market carries through into underwriting decisions, portfolio management, capital allocation and incentives – keeping the focus on sustainable, risk-adjusted returns rather than volume.
The analysis highlighted seven priorities for re/insurers as competitive pressure increases. These included defining the organisation’s cycle strategy, establishing clear underwriting boundaries, managing the portfolio, not only individual risks, aligning incentives with the cycle strategy, protecting expense discipline, optimising capital, investment and reinsurance, and building legacy and restructuring options earlier.
To conclude, PwC explained that soft markets expose the difference between having an underwriting strategy and being able to execute it. Firms that outperform are likely to be those willing to walk away from inadequate returns, actively redeploy capital and use the full range of strategic options before weaker economics force their hand.
Andy Moore, PwC’s London Market Leader, commented, “The industry has spent years investing in underwriting controls, analytics and governance. The real test will come as competitive pressures continue to increase. Previous soft markets showed how easily commercial pressures can encourage firms to prioritise premium growth and market share over pricing discipline and long-term profitability. The businesses that outperform over the next cycle are likely to be those that ensure incentives, underwriting decisions and capital allocation remain focused on sustainable, risk-adjusted returns rather than volume alone.”
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