CIAB newsletter 2013
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CIAB newsletter 2013

The old stock market saying that bull markets climb a wall of worry can equally be applied to hard insurance markets.

It is only human nature. Us mortals are consumed by the tendency to favour information that confirms our current beliefs and theories. This is what the shrinks refer to as confirmation bias, and it makes us gather information selectively, or interpret it in a biased way.

After years of rate declines and soggy demand, good news is initially received with scepticism and discounted, while anything negative is seized upon and amplified.

Optimists are ridiculed as deluded fools crying in the wilderness and good news never seems to be quite good enough

Why do we allow ourselves to succumb to this toxic bias when we already know that all market turns exhibit the same characteristics?

First rates stop falling and then eventually they start rising. Then we start seeing reserve strengthening and, at the periphery, company impairments and run-offs.

Once we get to the stage of compound year-on-year, rate-on-rate price increases, nobody should be in any doubt that the market has definitively changed course.

All of these things have happened in the US market in the past two years, yet we still seem far happier to seize upon the potential negatives than position ourselves for growth.

Players acknowledge consecutive years of rate increases compounding on top of one another, yet it is the fact that rate increases might not be as high in percentage terms as the year before that becomes the story.

When asked to describe the most powerful achievement in the history of human development Albert Einstein ignored all of science's near-miraculous discoveries. "Compound interest" was the world's greatest genius's response.

Consecutive annual price rises are a notable event and the rate of increase is far less important than the direction of travel.

There are also many other reasons to be cheerful.

The real economy in the US is doing just fine (finally). This translates into more jobs, more production and more trade.

More units of exposure are everywhere, and from construction starts to air passenger numbers, insurance demand is on the up wherever you care to look.

Also, although we may not be ready to believe it, after five years of negative interest rates, we are on the cusp of change. Okay, we might not be heading immediately back to the days of easy risk-free returns, but mere talk of the possible ending of central bank quantitative easing programmes would have been unthinkable this time 12 months ago.

Of course in these situations it is the contrarian that always makes hay, cutting through foggy-minded bias with common sense and logic.

But being a contrarian is a hundred times easier said than done. Indeed, were it easy, the term would become redundant as there would be no herd-like majority to counter.

We have the good fortune of having the world's most famous contrarians working amongst us in our sector. Shouldn't we simply observe what Messrs Buffett and Jain are up to and try to copy them?

Well let's see - in the recent past they've sucked up international cat-exposed business by the bucket load, taken a mammoth, unparalleled quota share of the Lloyd's market and launched a major US specialty operation with global ambitions.

Let's not forget that in the past few years Berkshire also quietly built up a major equity stake in Munich Re.

Of course, the added competition provided by Buffett is unhelpful, as is the extra Chinese insurance capacity and the growth of broker facilities. But let us remember that they are also a symptom of the relative health of the P&C markets.

So, surely it's time to focus on the positive? The sun is shining - in Colorado Springs and on our industry. And, after all, once everyone else starts doing so. It will be too late.

Enjoy your time at the CIAB and lets look forward to 2014 with some optimism...

Mark Geoghegan, Editor

The Insurance Insider

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