Underwriting Cycles
high confidence — compiled with source citation from the investment brain.
Underwriting Cycles
Underwriting Cycles
Insurance prices oscillate between soft and hard markets — periods of excess competition and falling rates, followed by periods of scarcity and rising rates — and the insurers that compound over decades are the ones who treat the cycle as the central fact of their business. The corpus returns to this repeatedly through berkshire-hathaway, Markel, and Fairfax.
Buffett's 1981 letter states both the mechanism and the discipline in a single passage. The mechanism: the investment losses that destroyed many insurers' balance sheets ended up "forcing them to abandon underwriting discipline and write business at any price in order to avoid negative cash flow", because "it's difficult to price much differently than your most threatened competitor", and such insurers "fear a major decrease in volume more than they fear a major underwriting loss." The discipline: Berkshire's managers "have sacrificed much volume, but have maintained a substantial underwriting superiority in relation to industry-wide results."
Buffett also contests the standard framing of the cycle itself: "Commentators continue to talk of the underwriting cycle, usually implying a regularity of rhythm and a relatively constant midpoint of profitability" — his own view was different. He argued that large underwriting losses would be the industry norm — that the "cycle" is not a sine wave around a profitable mean but a competition in which most participants chronically underprice.
Markel states the same stance from inside a soft market. In 1991, with the market "very competitive", the consolation offered to shareholders was that they were certain to be one year closer to the next hard market. By 2005 the discipline is fully articulated: "our disciplined underwriters know when and where to walk away from business as market conditions become less attractive to us", and it would be "suicidal to chase business as price levels drop below those necessary to earn good returns on capital. As a result, we meet competition where we believe we have appropriate margins of safety and walk away from business that we believe is underpriced." The "margins of safety" language is deliberate — the underwriting decision is a margin-of-safety judgment applied to a policy's price against its expected loss cost. In 2019 Markel restated the same flexibility as a structural advantage: as a specialty carrier it can "grow and shrink our revenues like accordion bellows."
Fairfax, under Prem Watsa, makes the same trade explicit from the capital side. In 2019, with rate conditions favorable, Watsa pledged not to repurchase shares "at the expense of ... taking advantage of a hard market in insurance", preserving capital to write more business precisely when prices reward it. The same letter frames results through the combined ratio — premiums and losses expressed as a percentage of each other, where below 100 means underwriting profit — the single number every insurer in the corpus uses to measure cycle discipline.
The through-line is that the underwriting cycle is a cycle in the full Marks sense, but with a twist: the winning move is not to forecast the turn but to be willing to shrink when prices are bad and expand when they are good. That willingness is what keeps insurance-float cheap — float is only free capital while underwriting stays disciplined through the soft years, a point developed under insurance-float.
See also
Sources
berkshire-hathaway/Letters-Markdown/1981 - Letter to Shareholders.mdinvestor-letters/Markel/Letters-Markdown/1991 - Shareholder Letter.mdinvestor-letters/Markel/Letters-Markdown/2005 - Shareholder Letter.mdinvestor-letters/Markel/Letters-Markdown/2019 - Shareholder Letter.mdinvestor-letters/FairfaxFinancial/Letters-Markdown/2019 - Shareholders Letter.md