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September 30, 2005

But you could have been a merchant banker

Dear Friend,

Do you think that (re)insurance is still seen as a second-class career choice?

The other day at lunch I was being quizzed by an experienced and very switched on public relations consultant about my slightly strange career path from reinsurance broker via financial journalist to editor of Reinsurance magazine.

I’m used to telling this story, so I launched into the standard potted history of how I drifted into the London Market after graduating because it was a place where I could use my languages etc…

When I was briskly interrupted

“So, you had a good degree from a decent university and you went into insurance? You sold yourself short — you could have been a merchant banker”. The conversation then turned to how in the old days in the London market having a university degree used to be the exception rather than the rule. Back then those with degrees were often put on something of an untouchable intellectual pedestal.

My generation — the one that graduated in the late eighties and early nineties — was probably the first intake to see the balance swing in favour of having had a university education.

Well, I never wanted to become a merchant banker and if I were motivated to a greater extent by money I would probably have been a better (and happier) broker, and would almost certainly still be doing reinsurance rather than writing about it!

But what I find curious is that the attitude still seems to persist that a career in (re)insurance is somehow an also-ran choice a long way behind asset management, private equity, options/derivative/bond trading and M&A. Even accountants seem to pack more pulling power.

But you and I know that specialty and pure treaty (re)insurance is a far more interesting prospect than any of the other careers listed above.

All of human endeavour, vanity, fear, folly, misfortune and failure is here (just open any claims file). It might not be in the book, but we’ll do it anyway:

“You want to insure your football team against relegation to the little leagues? Come on down!"

“You’re worried about getting two hurricanes and a quake in the same year? — don’t worry, I know just the guy to help”.

“You use your helicopters for fish spotting in the Pacific? — step this way, please”

“You’ve got an Albino gorilla worth $20m in a Spanish zoo? Does he smoke?”

“You’re worried your supermodel might die of an overdose before your $50m ad campaign airs? Well, this could be tricky, but let’s see what we can do…

There is nothing remotely dull about any of this — so let’s stop putting up with our bad press and get out there and tell people what we do. I love writing about such an all-encompassing subject so much that I jumped at the chance of becoming editor here.

There is no reason why the brightest graduates shouldn’t be hammering down our doors begging to come and work for us, so let’s get to work.

September 28, 2005

Why should Katrina be a market-changing event?

The week before Monte Carlo at the presentation of Fitch Ratings’ annual outlook for the global reinsurance industry in 2005, the guest of honour was Rolf Tolle, the Lloyd’s franchise performance director. Rolf unleashed a couple of slides that debunk the most popular myths about how the reinsurance cycle works.

The chart in question showed the US P/C loss ratio going back to 1967, and showed an almost perfect sine wave — each peak was followed by a descent into a trough followed by an ascent towards the next peak. Rolf commented that the date would show that this pattern could be repeated all the way back to 1920, but that he hadn’t been able to fit such a long series of data onto a slide.

Most of us tend to blame hard markets on events. We find it more rational to find a simple cause and effect explanation. In this way the early 1990s hard market is consistently blamed on Hurricane Andrew and responsibility for the premium hikes from 2001 onwards is laid firmly at the door of the terrorist attacks of September 11th.

But Rolf’s slide shows that this analysis simply doesn’t stack up — if the market really were driven by catastrophic events – the chart would have suffered massive random spikes as each hurricane, typhoon or earthquake made its mark. The harsh fact is the market was hardening before Andrew blasted into Florida and Louisiana and that the same was happening before Al Qaeda decided to declare open season on Western civilians.

After all, Hurricane Hugo (the biggest windstorm loss of its day pre-Andrew) did nothing to prevent the worst excesses of the soft market of the late 1980s and the Northridge and Kobe earthquakes did extraordinarily little to stop the rapid deterioration in pricing and terms and conditions that occurred from 1995 onwards.

So will underwriters get the new hard market that they crave this time? Let’s look at the damage. For rates to stop falling and start rising, capital has to be depleted sufficiently for it to need to be replenished and crucially, it has to be big enough to put potential capital providers off entering the market so that only the bravest will be tempted in.

One of the consensus issues that emerged from the Monte Carlo rendezvous time and time again was that as long as the total insured loss from Katrina comes in at under about $40-50bn, this will not be an event that depletes capital, merely impacting on this year’s profit and loss account. However, having come clean over this, what many reinsurers then said in the practically same breath is that they expected rates to rise across the board — but there is no reason why this should happen.

A quick look at the table of those players that have made their preliminary Katrina damage assessments shows that this analysis looks to be on the money. Apart from Montpelier Re and PXRE, most reinsurers are looking to take this hit on the chin without impacting their balance sheets.

And look at the capital and equity markets’ reactions — none of the major multi-line reinsurers’ share price has batted an eyelid. Munich re, Swiss re and Hannover re have weathered the storm more than adequately — but where else do investors have to put their money in search of a return? Whilst maintaining a bullish outlook for the group’s capital position and maintaining the dividend, Swiss re CEO in waiting, Jacques Aigrain pointed out that his company’s shares still yield more than Swiss 10-year treasury bonds at the moment.

And looking to the capital provision stakes, Montpelier re placed a $250m bond issue in absolutely no time after announcing the hurricane’s 31-46% blow to its shareholders’ funds. Speaking at Monte Carlo Hannover Re CEO, Wilhelm Zeller stated very plainly that “Capital is not a problem”, whilst recounting the numerous offers of new money he had had from opportunistic capital providers in the immediate aftermath of the storm.

So the two key ingredients are missing — there has been no significant depletion of capital and in any case far from being scarce and expensive, capital is cheap and plentiful.

The balance of probability suggests that pressure on rates is still likely to be down rather than up.

But let’s not overlook the human element — there is a psychological effect on negotiations however, as risk appetite may have been diminished. Can anyone with significant on or offshore Gulf of Mexico exposures go into the renewal season expecting anything other than an increase of some sort? What existing underwriter is going to be the first to renew as expiry?

September 23, 2005

In defence of proportional treaties

Dear Friend,

Remember proportional treaties and how laughably old-fashioned we used to think they were?

Back in the Dark Ages when I was a production broker trying (mostly in vain) to extract new business from Spain, my boss and I made a trip to a small provincial insurance company to see what services we could offer them.

Clearly no-one had been to visit this company for many years — they were extremely hospitable and pleased, if slightly puzzled to see us. After a very pleasant lunch, my managing director and I started getting down to the nitty gritty of finding out about the company’s current programme and possible future requirements. “Reinsurance?” came the slightly quizzical response “Oh, we do that with ‘La Munchener’ [Munich Re]” — how long had they been doing business together, “About 50 years”.

In fact it turned out that this little company’s proportional treaty with Munich re had been running without cancellation for over half a century, with the occasional endorsement to increase the limits. And any facultative business was sent to Munich Re’s Madrid office and dealt with by return of fax. We left our brochures for multifarious specialty coverages, exchanged business cards, and headed back tot the car park knowing that we had (albeit pleasantly) wasted a day’s work.

The long-term trend had been towards building stronger capitalised primary players for so long that traditional quota shares and surplus treaties were seen as something that were just about okay for emerging markets, but a bit of an anachronism for a first-world players. There was always a reaction of “why should I lend my balance sheet to these guys?” when such a deal was ever mooted.

There’s been a lot of soul-searching recently about how the reinsurance business has become detached from primary markets and is unable to influence underlying rates any more. But we’ve only ourselves to blame — this must be down to the demise of proportional treaties.

The beauty of proportional reinsurance is that there is no greater expression of partnership between reinsurer and reinsured. You’re in it together — “If you bleed, I bleed”.

Excess of loss automatically disconnects the buyer from supplier so now it’s “You bleed, I might not”. Any buyer having to cope with four Florida hurricane retentions last year will understand that. Whatever the industry says to the contrary, the relationship eventually moves from one of co-operation to one of exploitation.
Disputes are an inevitable consequence after big losses —just look at the looming hours clause arguments over Katrina. We’re faced with the ugly possibility of contract parties doing their sums and working out whether a one loss-event scenario or a two loss-event scenario suits them best and arguing that white is black and then black is white whenever it suits them. Where’s the “partnership in risk” in any of this?

And what’s the chance of hanging onto a customer for 50 years straight these days?

We were wrong to have laughed at our backwards provincial friends.

September 16, 2005

Cancel the skiing holiday

Dear Friend,

Just back off the plane from Monte Carlo and here’s the sellers’ pitch for the year:

“A large chunk of this year’s profits are going to be wiped out, but unless something really bad happens and the total loss doesn’t exceed $Xbn (insert random number between 30-60 for X), our loss estimate and our capital isn’t in any danger. We’re planning to hike rates pretty much across the board or at least stop them falling. It all comes out of the same pot, you know.”

And here’s what buyers are saying:

“If they think we (insert non loss-affected territory as required) are going to pay for this, they’ve got another thing coming — we’ve been subsidising the US for too long.”

Wasn’t it always like this?

The brokers are the guys getting it in the neck from both sides — but that’s what they get paid to do! Although I bet they probably wish they still get paid brokerage on reinstatements, they’re still looking at a pretty good scenario overall.

Unless there really is a capital crunch and those left standing really do get to increase rates substantially, demand should be up, and rates should end up flat over all — up a bit here and down a bit there.

Many brokers told me that lots of their loss-affected clients are probably kicking themselves that they didn’t buy more cover last year, just for the sake of a few points on the rate on line. And a senior figure at a top-three reinsurer told me that he couldn’t think of a better advertisement for buying quality reinsurance than Katrina.

But the X-factor here is capital depletion – no significant capital depletion, no market changing event and no change in the soft market part of the cycle in which we find ourselves. And don’t forget that there is a massive pile of capital waiting in the wings, itching to put itself to work in the reinsurance market should it be required — the providers are so flush that it will take a lot more than Katrina to put them off investing in reinsurance.

And as I got very used to hearing this week “it’s far too early to tell”.

The only certainty is that the renewal season is going to start much later than usual and is going to be stretched right to the end of the year.

No buyer wants to look weak by coming in early for cover. The price of ending uncertainty for buyers will be definitely be higher this year than last year, but my gut feeling is that canny buyers are going to call the market’s bluff and wait until someone blinks.

So it’s a busy Baden Baden and a long December that we have to look forward to.

Cancel the Christmas holiday — there will be no rest for brokers until the middle of January.

September 2, 2005

Two good things about Katrina

Dear Friend,

This week all our thoughts go to the victims and displaced people of the southern United States in the wake of the devastation wreaked by hurricane Katrina.

I sincerely hope that you have accounted for all friends and family from the region.

As the situation slowly stabilises over the next few days and the enormous US federal relief machine slowly swings into action, it’s important to look to two major positives:

Major positive number one — no (re)insurer is likely to fail because of this storm. One of the worst-case disaster scenarios the global industry has feared and planned for many years has happened and we will stand up, clean up and pay up. This is something we should be proud of — what better advert could there be for our often maligned industry?

Major positive number two — this disaster has forced insurance-related issues right to the top of the US political agenda. When Air Force One flew low over New Orleans, the whole dynamic of the situation changed. Building codes, evacuation plans and sea defences are going to be top priority for politicians of all hues for the foreseeable future. Our industry is finally going to get some of its concerns properly listened to by those in office.

Back in 1853 the London Illustrated News observed that New Orleans “has been built upon a site that only the madness of commercial lust could ever have attempted men to occupy”. But the simple fact remains: New Orleans is where it is because it is the gateway to the whole of the mid-west, and let’s not forget — a stronger levée would have saved the city from flooding.

And sitting here in London, barely above sea level and protected by a levée of our own, we can only sit and wonder if we will be the victims of our own “commercial lust” some day.

Editor's blog, photo of Mark Geoghegan

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