Dear Friend,

How the Gods do conspire against us

— but at least they have a sense of humour.

Everything seems to be subject to a natural equilibrium that doesn’t allow imbalances to survive for very long.

Of course, this equilibrium can be stretched, in fact sometimes it can be stretched so far that we believe we are in a some sort of “new paradigm” or new world order, or perhaps we just achieve a general consensus that things really are different this time and that the bad old days of the past are indeed behind us.

But the elastic of history never seems to break, biding its time until counter momentum slowly builds, eventually catapulting us back to where we came from with a violent crash.

What’s brought this on, you may wonder? Well I’ve been looking at the 1997-2001 accident year numbers again — and I just can’t get them out of my mind.

With reserve hikes to pay for the sins of this period still a major feature of many 2005 results, the subject is still one that commands my attention. I’ve also just been poring through all the second quarter results, looking at the reserve developments on Katrina Rita and Wilma and like a fool, I think I must have just kept on going.

In the 1997-2001 period, you could have asked any broker on the planet whether they thought premium rating levels were adequate and they would tell you the market was not merely soft, but collectively soft in the head. We knew the market was going through one of its periodic bouts of suicidal competition.

We knew it would end in tears and recriminations, but we didn’t know when, where or how.

We were also utterly powerless to stop it. No-one asked our opinion, and if they had, they would probably have ignored what we had to say anyway.

What possessed underwriters to charge the premiums that they did over that heady period? Why was everyone so bullish all of a sudden? How can you lop 20% off a premium every year for four years in a row and expect to leave a profitable rump of business behind?

With the benefit of hindsight, we can now see that rating was woefully inadequate. No rational person should have put business on their books at those prices.

When an underwriter doesn’t do as he should, he is accused of making mistakes. And the average underwriter did do things that might seem stupid to us commentators five years after the fact.

But we’re all the ones making the bigger mistake — although some do a pretty good impersonation, an underwriter is not a cold, calculating, rational risk-weighing machine.

He or she is a human being, with all the fallibility, pride, greed and fear that comes with it. In an environment where there are right decisions and wrong decisions to be made on an hourly basis, it only seems rational that the “wrong” column should end up with its fair share of entries.

That’s why there’s always a lot more behind market cycles than meets the eye, and it is only a matter of time before a new generation of mistakes comes in to supercede the old ones.

To coin a phrase, history doesn’t repeat itself, but it sure does rhyme!