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Warranted no losses

Dear friend,

I’m back and I’m fighting fit.

And what a world we find ourselves in today. What a state of perturbation — such ebb and flow and flux. We see takeovers, rescues, staff-poaching, gossip, intrigue and skulduggery in various forms — but mostly we just see human frailty and folly.

Doing my job is a bit like throwing yourself into the wild rapids of a mountain stream and paddling like hell — it’s hard to keep up, but it’s invigorating.

Lets’ look at what the world has dashed onto our rocks this week:

Check this out for evidence of a softening market — a vastly respected and eminent multi-national insurer sent me news of a new commercial insurance product yesterday — yeah, big deal, I know.

But a couple of bullet points on the list of coverages jumped out at me like Pamela Anderson’s top on a Baywatch re-run.

• No warranties
• No condition of average
• No business description

No kidding?! What is the world coming to? I was half expecting the next one to be ‘No premium payment until you make your first claim’!

Don’t misunderstand me — I hate warranties.

What has to be the least funny jape of any underwriter has to be the one where he or she writes ‘warranted no losses’ on a wording you are in the middle of agreeing. Oh how our brokers’ sides nearly split when our underwriter friends wheeled that one out of the crummy old jokes retirement home!

But whilst warranties may very often the last refuge of the non-paying scoundrel, even I would have to concede that they are usually there for a good reason.

The same goes for average and non-disclosure — never mind that they are blunt instruments that can sometimes applied unscrupulously, these legal concepts evolved to stop insurers being ripped off — and to preserve precious assets for legitimate claims.

It appears that the customer really is right in these ultra-competitive days.

I just hope this new-fangled policy is seriously expensive — it looks like its going to need to be!

But just as one market softens and melts like a camp-fire marshmallow, so another chars and cracks like a roast chestnut.

The bond default insurance market is roasting, and our old friend Warren Buffett is turning the spit with relish. He’s just licensed a new bond insurer. A few weeks ago incumbents were saying they might get some quota share help from the big man. But this move makes it look like he’d rather be a shark than man the lifeboats.

Or maybe he’ll do a bit of both? Good for him, whatever he chooses.

How obvious the whole debacle seems with hindsight — risk premiums don’t stay low forever — they never do — but they often stay low long enough for people to forget themselves for a while.

In the same way that a triple-A CDO might theoretically the same quality paper as a government bond, but can never quite claim to be the real deal, so a BBB municipal bond wrapped by an AAA bond insurer is never quite going to cut the mustard, despite its pristine label.

In fact we now realise that a monoline bond insurer looks an awful lot like a walking, talking, incorporated CDO – it’s a whole pile of risks all bundled together, and a few stinkers can infect the whole thing.

We live and learn and try to keep our heads above water — and luckily Mr Buffett is here with his AAA-rated double-hulled battleship to either pull survivors out of the water or put them swiftly out of their misery with a quick competitive salvo.

We even hear delicious rumours that the Bank of England and Goldman Sachs want Buffett’s help wrapping a rescue debt package for a failing UK mortgage lender it is currently propping up with the help of the UK taxpayer (to the tune of over $100bn).

What’s a reinsurer to make of this?

Well, it’s a great reminder that capital is sometimes extremely hard to come by and can suddenly and unexpectedly become highly prized (and priced). This means it’s always a good idea to have a little more on hand than you thought you needed, just for a rainy day.

And let’s face it, we never know when it’s going to start raining in our market — take your pick of any number of dark clouds all capable of giving us a soaking.

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