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?