Just like 2008 all over again
It was another renewal season that promised much at the outset,
with a lot of fighting talk about steely resolve from underwriters.
But it would also appear to be another year in which some of that
resolve crumbled at the last minute, as underwriters preferred to
write for low prospective rewards rather than walk away and
potentially put themselves out of a job.
It's another year where everyone's best estimates of
industry capital are healthy despite a spate of heavy cat losses.
And it's another year of anaemic forward returns with the
nagging possibility that much of the casualty business currently
going on the books has virtually no realistic possibility of making
a positive contribution.
It's another year of atomisation in the markets where every
rate increase, however small, has to be justified by poor loss
experience.
And it's another year of whizz-kid property cat start-ups
skimming some of the only cream left rising to the market's
surface.
Does any of this sound familiar?
Yes, it feels just like 2008, only worse.
Back then we had had a financial crisis, negative real interest
rates and Ike and Gustav. Now we have the after-effects of the same
financial crisis, an even more punishing investment outlook and the
Asia Pacific cats. Back then, property cat also managed a
spluttering uptick in pricing but little changed elsewhere.
Welcome to 2012 indeed!
But there is hope.
First let's look at capital surpluses. Capital in our industry
has always been the very small difference between two very large
numbers. One man's surplus can swiftly change to become another
man's deficit. And when loss assumptions and projected
investment returns change, deficits can open up like vast crevasses
in the arctic thaw, swallowing up the unwary reinsurance
adventurer.
In the investment sphere we are into our fourth year of negative
real interest rates, and at some point this is going to have to be
factored into long-tail casualty pricing. We have also come off a
long period of benign loss trends in major casualty markets that
has probably now ended, and reserve releases are drying up.
At a time of global financial panic when the pricing of the risk
for sovereign governments' long-term financial liabilities is
pushing multi-decade highs, it is tragicomic to see reinsurers
willing to price far more volatile liabilities at near or below
historic lows.
At least in 2008 there were some easy investment wins to be made in
high-grade corporate debt that had been harshly marked down in the
market shake-out. But it is not so this time - 2012 sees little
attraction in any asset class bar cat bonds, and unfortunately
we're already as long as we can be on that trade.
The bond vigilantes are almost always right and at some point
western governments will get the inflation that - in the main -
they have been seeking, and the correction will come hard and fast
for casualty writers. When this happens, no one will be saying that
the industry is overcapitalised.
For an expensive example of how quickly things can change, just
look at the savage mauling a class as well studied as UK motor has
managed to mete out to some very seasoned players over the last
couple of years.
Meanwhile, the tightest class in our business, property cat,
continues to show that the fundamental laws of supply and demand
haven't been suspended.
Price rises can and do stick here. Of course, they have to be given
back again a year later if all runs clean, but that is also logical
and correct.
And at least unscientific experience has always seen the worst cat
years followed by extraordinarily benign ones - just as 2006 and
2007 brought a bumper harvest after 2005, 2009 saw a return to
near-record profits.
It probably is like 2008 all over again but at least the advice
remains the same: don't be aggressive, keep capital in reserve,
stick to short-tail where possible and hope for the best.
If you are inclined towards optimism then there is even the good
news emerging from the US on primary commercial rates finally
nudging upwards - albeit gently - in the second half of 2011.
But looking at the 1 January renewals overall, it still seems
premature to talk of a broad "market turn".
We wish you a happy and prosperous 2012.
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