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Dodge a bullet, get hit by a bazooka

Dear friend,

I’m going to make a bet with you

I bet you that by the end of this you will be feeling a little foolish.

Why? Because you will undoubtedly have forgotten to vote in our Annual Reinsurance Readers’ Awards

So why not go and do it now before you forget?

I’m not looking for money off you, I’m not after your bank details, I’m not after your email address — I just want you to vote.

And while you’re at it, forward it on to your contacts and work colleagues — this year I want the biggest turnout ever.

Right, now that’s off my chest, let’s get down to business.

This week the global financial bubble deflated a notch further but the reinsurance industry congratulated itself on having dodged the bullet of D&O losses from shareholder class actions against big US financials.

Guy Carp put out a great report on this — so far the big number is a sneeze when set against any self-respecting US Hurricane landfall.

I suppose we all knew that D&O was not a big reinsurer exposure since everyone got cold feet post Enron and Worldcom and the big direct US guys have been slugging it out for market share since 2004.

But with all this, maybe it’s a case of dodging a bullet to run slap into a bazooka round.

It’s sometimes easy to forget that the proximate cause of the credit crunch is the default by mortgagees on their home loans and that this is the trigger for a global economic slowdown.

It’s a beauty isn’t it? People at the bottom can’t pay back some loans, triggering defaults right up the food chain and forcing up inter-bank lending rates. Whoops! Higher bank rates end up causing more defaults — lending is again dented and risk premiums rise further and trigger further waves of default — and round we go again.

Bung in falling house prices and the prospect of a stockmarket slump as earnings top out, led down first by financials and construction, then retail, and followed by pretty much everything else, except perhaps defence and resource stocks and anyone who still thinks this doesn’t affect the wider economy is losing the plot.

What reinsurers should be worried about are more traditional lines, not a bunch of shareholders suing a load of directors for frittering their money away on ropey experimental paper instruments.

Does anyone who worked in the UK market in the early 1990s remember private mortgage insurance? Well start looking at your Mortgage Guaranty numbers, guys, and start worrying.

How about mortgage payment protection business? The outlook for employment is hardly rosy, is it? How many more US construction workers, mortgage brokers and real estate agents are going to get laid off in the next 12 months?

And what about bonding and surety, or just plain old ‘credit’? The leg bone of credit is connected to the thigh bone around about here and we know that credit is crunching. Bones do not tend to crunch in isolation. It is only a matter of time now before a big property developer files for chapter 11.

CAR/EAR — bit of a no-brainer here, but big government infrastructure projects may take up the slack — so we won’t worry too much.

But we also know that empty, in arrears or repossessed buildings have a dreadful habit of burning down — one for the property guys to worry about.

I reckon before this downturn is done it will bring a little bit of misery for everyone.

We often boast about working in a non-correlating industry that has its own independent business cycle, but we ignore our relationship with the wider economy at our peril.

PS. Forgot to vote? Bet you’re feeling silly now!

Redemption is still possible at:

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