Three elephants

There’s a wryly amusing article from Garry Booth over at the Lloyd’s Risk blog on the difficulties facing the market as seen from Baden-Baden.

The three elephants in the room to which he refers are: capital market meltdown, falling share prices, and global economic recession.

Primary insurers who want to maintain their current business model (ie stay in business) are suddenly more dependent on reinsurance than they have been for a long time. It is virtually the only form of capital relief left open to them given the state of the markets. They want to retain less risk, they want to buy more reinsurance.

But reinsurers live in the same world. They are less exposed to the markets, but they just got smaller as well. As well as taking a hit on the asset side of their balance sheet, they’re finding (to their astonishment in some cases) that losses from Ike just keep on coming.

Booth goes on to point out, tellingly in my view, that part of the problem is that reinsurers have not actually lost a bunch of money out of Ike, in overall terms. They’ve been well-prepared and are actually sitting on a ton of capital — which means that prices probably aren’t going to start going up in the immediate future.