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Carriers are behaving wholly rationally in their retrenchments

This is nothing like a proper hard market.

When people over 40 mention a hard market they have a very clear idea of what they mean. Very few of their fellow practitioners with under 20 years’ experience really know what they are talking about.

For the old-timers, hard markets are about true shortages of capacity. They include an inability to place some types of business at any cost. They mean rationing and shortfalls on programmes, with clients unable to get all the cover they need.

Of course, what the grey hairs are actually describing is market failure. The market used to fail regularly. Sometimes it couldn’t clear at any price. Brokers had to resort to extraordinary steps to meet client need and had to create new counterparties all by themselves.

Investors were so wary that the early Bermudian carriers such as Ace and XL were almost self-funded mutuals, with the lion’s share of capital coming from their own customer base.

Today’s late-stage soft market is evolving, and there are places where it feels a little crunchy.

But there is no question that the market still has an insatiable appetite and capacity to assume risk.

Carriers are behaving wholly rationally in their retrenchments. Loss-making lines, and those that may scrape a profit but do not meet return hurdles, are being trimmed and clipped.

But come to the market with a well-rated deal and it will be massively over-placed. There is nothing wrong with even the crunchiest parts of the market that a few points of rate won’t fix.

Take the collateralised retro portion of ILS. Redemptions, tie-ups and capital freezes may sound dramatic, but they are utterly insignificant in the grand scheme of things.

The small portion of that market that is currently dislocated is the victim of its own contradictions. ILS and collateralised reinsurance are a reason the market works better and has ridden loss events in a smoother fashion. This is because its capital is largely stable and rational. It has a long-term view of the price it needs to charge. Its better elements will keep faith despite the events of 2017 and 2018.

Having constructed such stable and rational capacity with huge ability to absorb losses, it was foolish to then tell elements of that capital base that post-loss rate hikes were achievable in 2018 when they weren’t.

The redemptions should be no surprise – the newer investors now pulling their cash were promised magical returns that failed to materialise.

Let us not also forget that, with capital levels still at an all-time high, retro is an optional purchase. If retro writers try to charge much more, reinsurers simply buy less and put out smaller aggregate limits. Any shortfalls are readily taken up by other market participants, many of which have been waiting patiently on the side-lines to get onto programmes that they were knocked off years ago.

As long as the rate still makes sense the deal will get done.

Market failures will come in new and unexpected ways, but don’t be distracted by today’s wholesale re-underwriting and the ILS redemptions. This is all good healthy stuff, but it is nothing like the broad market turns of yesteryear.

This ain’t nothing like a hard market, but that is very much a good thing for everyone. 

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