Softening conditions

I was having a chat with a client of mine the other day. He looked a bit glum, and when I asked him about the state of the market it was a chance for him to let rip.

> You know, Jolyon, the thing about the insurance and reinsurance game is that it’s not really difficult to make money. A lot of people in it are not very bright and they get greedy. Look at the rates now – people keep saying how hard it is, but that’s just not true except in wind-exposed parts of the US and even that is turning. Everything else is heading south at a speed which I haven’t seen before in the last 20 years and more of underwriting. It’s madness.

> Also, a lot of people have made a LOT of money this year through not buying outwards protection on the gamble that after last year’s horrors it couldn’t be as bad this year. Even though we’re not quite at the end of the season, it looks like they were right in that gamble – but if they hadn’t been, many would have gone to the wall. I *did* buy outwards cover on a more or less as normal basis: so I haven’t made as much money as others, but then I didn’t stake my company to make that extra. Why are people so bloody short-term about everything, especially in an industry that is supposed to concern itself with the longer term?

And that, O reader, has always seemed to me the very heart of the problem in the international re-/insurance industry – too little consideration of the long-term, and too much emphasis on the quick buck.

As a lawyer, I see it time and again in disputes. There’s often some sweet little deal that’s been put together and if everyone keeps their heads, doesn’t abuse the facility, keeps a little discipline, all the parties are going to make a very healthy amount of money with relatively little risk. But does it turn out thus? No, usually not. There’s always one person who thinks he’s cleverer or more deserving than the others, or simply more anxious, or more greedy or whatever. He begins to push on, accepting more risks than he should do, relaxing terms in order to get more business, offering incentives to less proper brokers to entice still more business, not ceding a fair proportion of the business to his retros.

>How do I rook thee? Let me count the ways./ I rook thee to the depth and breadth and height…

*(with thanks to Elizabeth Barrett Browning)*

And of course this has a knock-on effect, such that pretty soon everyone is at it and the whole thing comes tumbling down amidst a welter of accusation, counter-claim and protested innocence. And of course there come the inevitable slides into run-off, administration and insolvency.

So, I reckon we have all this coming, mes amis. Mark Geoghegan, editor of ‘Reinsurance’ and ‘fac’ magazines, also writes of this on his new blog, blog-re, and I think he’s got it pretty right:

> …it always pays to rely on what you can see with your own eyes as opposed to what you are being fed. And at the moment across non-Cat exposed US property and casualty classes prices are coming off 10% 20% or 30% over this time last year, and even the burnt out Cat rate rises seem to be reaching a peak.

> That is all the analysis you need – this IS a softening market and it’s going to get an awful lot softer.

An old broker friend of mine put it slightly differently to me a number of years back. “*You know, Jolyon,*” he said, “*it’s like travelling on the M1. You start out reasonably steadily in the middle lane, then cars start whizzing past you on the outside, so you slip out yourself and start going past other cars. Before long, you’re tearing along pretty crazily. Then there’s a terrible accident up ahead, cars strewn all over the road, all lanes blocked, ambulances everywhere, all very horrid. You leave the motorway and proceed to your destination by side roads, vowing not to use the main roads again.*

“*But after a while, it just takes too long to go from A to B on by-roads, so you take a short stretch on the motorway. Hey, it’s not too bad, as long as you stay on the inside lane. Then that feels a bit slow, too, especially with that old Land Rover pottering along at 45. So you edge out into the middle lane, get comfy and before you know it, you’re in the fast lane and tailgating at 95.*”

Do be careful how you drive that sparkly reinsurance roadster. I can see the potential for a crash coming.