The insurance industry is no longer as cyclic as it used to be, according to Marsh Executive Director Scott Leney. And insurers can do more to reduce the effects of the legendary insurance cycle even further.

He told the Risk Management Institution of Australasia conference in Sydney that these days the local insurance market is “most of the time just a market place with minor fluctuations in capacity and pricing around the mean”.

During the past decade, the global insurance industry has experienced several significant events, such as Hurricane Katrina costing $US55 billion ($56 billion); the attacks on the World Trade Centre $US40 billion ($40.8 billion); and the Chilean earthquake $US22 billion ($22.4 billion).

But Mr Leney says it’s not just losses that affect the state of the insurance market. “We should also look at the broader economic climate of the past few years.

“We’ve also seen strong global growth since 2001 until the ‘unimaginable’ happened – the global financial crisis and ensuing global recession.

“From an insurance perspective, we saw the value of the world’s largest 10 insurers shrink by 25% and, in AIG’s case, a share value loss of 99% at its lowest point.”

Mr Leney says while US insurance markets have hardened sharply after the Gulf of Mexico disaster, this hasn’t affected the Australian market.

“Marsh sounded warnings in 2007 and 2008 about the combined impact of a depressed investment market, a large insurer failure and a market loss event of more than $50 billion,” Mr Leney said.

“Then the global financial crisis was upon us. There was the very near collapse of AIG and further hurricane events threatened the market.”

This should have led to a hard market in Australia, but it didn’t happen and insurers returned to modest profitability in 2009.

He says this return to profitability reinforces the point that the insurance market is not cyclical, and that the forces of supply and demand created different outcomes for insurers over the past seven years.

“The market is more resilient now than it has been in the past,” Mr Leney said.

“Singular events have got to be much bigger than those we’ve seen in the past to impair the insurance market.

“And today, there is more rapid flow of risk capital keeping competition high.”

He says insurance is now seen as a relatively safe segment for investors, despite the problems stemming from the global financial crisis.

“Demand for insurance is somewhat recession-proof, but I think it also has something to do with insurance-buyers’ faith in the insurance market itself.

“I think insurance-buyers have a better understanding of the protection afforded by local regulation these days.”

He says Australia has a healthy insurance market, and insurers “deserve a pat on the back for successfully riding though the turbulent times of the last decade”.

But while the industry has done well, Mr Leney says it still needs to learn some lessons from the past decade and prepare for future major losses.

He says companies should understand their risks, their probability and potential severity.

To achieve this, controls should be in place including contingency planning that is tested for low-probability and high-severity events.

Companies should also understand how much risk can be retained onboard before seeking insurance for the insurable risks.

He says a risk financing program should be in place to optimise the total cost of risk, “then execute on a placement strategy, paying attention to the reinsurer’s financial security, willingness and track record in paying claims”.

“The key point is that insurance program design and broader risk management practices should not be handled in isolation.”

Mr Leney says that by understanding and managing high-severity risks, insurers can help to create an insurance market “that is less prone to the cyclical swings of previous decades”.