Profits in property and liability insurance have tended to rise and fall in fairly regular patterns lasting between five and seven years from peak to peak, this phenomenon is termed the underwriting cycle. Stages of the underwriting cycles may be described as follows: initially, when profits are relatively high, some insurers, wishing to expand sales, start to lower prices and become more lenient in underwriting. This leads to greater underwriting losses. Rising losses and falling prices cause profits to suffer. In the second stage of the cycle, insurers attempt to restore profits by increasing rates and restricting underwriting, offering coverage only to the safest risks. These restrictions may be so severe that insurance in some lines becomes unavailable in the market place. Insurers are able to offset a portion of their underwriting losses through earnings on investments. Eventually the increased rates and reduced underwriting losses restore profits. At this point, the underwriting cycle repeats itself.

The general effect of the underwriting cycle on the public is to cause the price of property and liability insurance to rise and fall fairly regularly and to make it more difficult to purchase insurance in some years than in others. The competition among insurers caused by the underwriting cycle tends to create cost bargains in some years. This is especially evident when interest rates are high, because greater underwriting losses will, in part, be offset by greater investment earnings.