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Never forget - insurance is just finance

Dear Friend,

As a broker just starting out in the London market, the first year is probably the hardest.

In these first 12 months, all your pre-conceptions are thrown out of the window (if indeed you are one of the few entrants to the industry to have any!) and your useful knowledge ascends an almost vertical growth curve from precisely zero.

Early into my second month on the job I traipsed into an underwriting room, probably bearing an impossibly cheap Spanish property risk, or a dull-as-ditchwater endorsement changing a schedule of Venezuelan co-reinsureds, to learn a very important first lesson.

The friendly underwriter duly put his button stamp down on the slip and started making polite conversation as we watched the photocopier do its thing.

“So, how are you taking to the world of high finance?” He asked.

I was taken aback — I really hadn’t thought of what I was doing as “finance” and, whilst I didn’t think it was a lowly occupation, I certainly didn’t regard any of what I was doing as particularly “high” either.

But as I chewed the idea over on the way back to the office, I concluded that finance was a pretty good description of what we were both engaged in.

If a man wants a house — without finance, he has to save up for most of his life before he can buy one outright. With finance he can have one right away and spend the rest of his life paying it off!

Not having been able to afford the house in the first place, the proud new homeowner now realises that he can scant afford anything bad to happen to the house —it’s his biggest asset, and the only thing standing between him and the insolvency courts.

He also realises that having entered into a 30-year mortgage, dying would probably be a bad idea too.

Thus the global (re)insurance edifice is constructed — on the twin pillars of Life and Non-life.

Now the conclusion of this amateur moral philosophy is only of value when you realise that if insurance is just another form of finance , it cannot exist in a mutually-exclusive bubble away from the wider financial world.

Once you realise this, you start to see that the idea that the insurance market does not correlate with other financial markets is an extremely dangerous one.

Hedge fund managers beware — if insurance is merely a form of contingent finance, it must be affected by the global markets as a whole. Everything is inter-related, it’s just that we don’t yet fully understand how the relationship works. Yes, it might end up that the reinsurance cycle is inversely correlated to bond markets fluctuations — but we can’t know with any certainty.

It is just as likely in the grand scheme of things that a perfect storm hits the bond, stock and insurance markets simultaneously.

Until that unlikely, but probably inevitable day, good luck with your high finance everyone.

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