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HMRC internal manual

General Insurance Manual

HM Revenue & Customs
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The insurance and provisioning cycles

The insurance or underwriting cycleMost industries experience some cyclical phenomena, but in general insurance the business cycle (referred to as the insurance or underwriting cycle) is particularly pronounced. This is partly because of the existence of the need for insurable interest, which militates against the existence of a secondary market – see


Beginning at a ‘soft’ point in the cycle, this is where premiums are low, capital is plentiful and there is keen competition. As premiums continue to fall, underwriting losses become pronounced. That tends to discourage capital and competition for new business diminishes. Premiums start to rise and the market hardens. Business starts to look attractive again for investors, capital becomes more plentiful and the process begins again.

The cycle is fairly regular in less volatile business classes, with a period (peak to peak) of about 8 years. Underwriting results (as a percentage of net earned premiums) can be plotted as a time series and the result is fairly close to a regular (sine) wave. More volatile classes of business may be affected by the happening of a catastrophe (such as a serious hurricane), but the underlying pattern is still discernible and the amplitude (the displacement) tends to be greater.

The provisioning or reserving cycleHere the graph is a time series of the size of initial over or underestimates of ultimate claims outturns. It is distinct from the underwriting cycle, but quite closely in phase with it. It is visible across different underwriting classes, and again is more irregular, and more pronounced, for volatile classes of business. The reasons for the existence of this cycle are a matter for debate. It may be that

* the existence of the underwriting cycle makes it difficult to apply traditional historic trend and pattern actuarial techniques effectively
* all the business factors have not been fully appreciated and taken account of
* booked provisions differ from the actuarial best estimate (including risk margin, where appropriate), perhaps deliberately for counter cyclical reasons.GIM6000+ discusses the methods applied to adjust technical provisions for tax purposes where necessary.