Warren Buffett pretty much sums it up in his 2004 shareholder letter. The excerpt from that letter below is regarding Berkshire Hathaway's purchase of its first insurance company NICO for $8.6 million in 1967 and why the insurance industry continues to struggle with underwriting profitability to this day. In short, the primary reason is because most insurers can't stomach top-line volatility in premium revenues. That is, they have difficulty tolerating market share losses and loss of customers, even if that's what's required to maintain underwriting profitability through inevitable, cyclically "soft" P&C markets:
From Pages 6-8 of Berkshire Hathaway's 2004 Shareholder Letter:
Most American businesses harbor an “institutional imperative” that rejects extended decreases in volume. What CEO wants to report to his shareholders that not only did business contract last year but that it will continue to drop? In insurance, the urge to keep writing business is also intensified because the consequences of foolishly-priced policies may not become apparent for some time. If an insurer is optimistic in its reserving, reported earnings will be overstated, and years may pass before true loss costs are revealed (a form of self-deception that nearly destroyed GEICO in the early 1970s).
Finally, there is a fear factor at work, in that a shrinking business usually leads to layoffs. To avoid pink slips, employees will rationalize inadequate pricing, telling themselves that poorly-priced business must be tolerated in order to keep the organization intact and the distribution system happy. If this course isn’t followed, these employees will argue, the company will not participate in the recovery that they invariably feel is just around the corner.
To combat employees’ natural tendency to save their own skins, we have always promised NICO’s workforce that no one will be fired because of declining volume, however severe the contraction. (This is not Donald Trump’s sort of place.) NICO is not labor-intensive, and, as the table suggests, can live with excess overhead. It can’t live, however, with underpriced business and the breakdown in underwriting discipline that accompanies it. An insurance organization that doesn’t care deeply about underwriting at a profit this year is unlikely to care next year either.