Refusing to follow the herd, providing the right incentives for underwriters and investing in risk management tools have been recommended by Lloyd’s for companies managing the insurance cycle.

Lloyd’s says uncertainty remains over prices and conditions in the commercial insurance market following last year’s record hurricane season. The cycle has historically been characterised by peaks and troughs that reflect the rise and fall of insurance prices.

“It alternates between periods of soft market conditions, when premium rates are stable or falling and insurance is readily available, and periods of hard market conditions, when rates rise, coverage becomes difficult to find, and insurers’ profits increase,” it said.

Lloyd’s says that as the market softens to the point that profits diminish or vanish completely, the capital needed to underwrite new business is depleted and insurers that have not underwritten prudently can lose millions.

The report recommends several steps to making the industry more predictable and ensuring it underwrites on a sustainable basis.

These are: don’t follow the herd; invest in the latest risk management tools; don’t let surplus capital dictate your underwriting; don’t be dazzled by higher investment returns; don’t rely on “the big one” to push prices up; and redeploy capital from lines where margins are unsustainable.