Monte Carlo 2018 Day 3

Another Monte Carlo with hurricanes attached.

Last year Irma was barrelling across the bottom of Florida, keeping us all guessing right up until the last minute. Delegates loaded their favourite storm tracker onto their phones and hit refresh after every meeting.

Would we get “Irmageddon” with a direct Cat 5 hit on Miami, deleting industry capital, or would the roof be ripped off another year’s earnings?

In the end, it was the latter.

This year we have Florence threatening either of the Carolinas with a Cat 4 landfall. She may bend north and, like so many before her, just scrape Cape Hatteras and leave us alone, or she may keep going straight and hit hard.

Either way we will have our answer on Thursday as the Rendez-Vous draws to a close.

But we already have our most important answer.

For, unless Florence intensifies to a Cat 5 and veers miraculously south towards Miami Dade, we already know one thing that she is not.

She is not a capital event.

Florence is here to make another dent on our earnings and test our investors’ patience to destruction. In Greek mythology, Sisyphus was condemned to an impossible task.

He had to roll a huge stone ball up a hill through eternity. He could never quite get the ball safely to the top before his strength gave out and it rolled back down to the bottom with a crash.

It looks like we are going to be condemned to the Sisyphean task of paying claims that mean we earn very little in 2018, but with little or no pricing reaction because of capital levels not being depleted sufficiently.

As with this year, we may get the rating ball halfway up the hill but new capital inflows will cut us off before we get to the sunny uplands.

As Willis Re’s president and global head of casualty Andrew Newman said at his firm’s press conference on Sunday, capital creates a ceiling on pricing while modelling creates a floor.

We can neither have it too good nor can it be too bad. If the ball rolls up the hill too far, new capital weighs it down, but when it rolls to the bottom it doesn’t go any further down because the models have given the market an absolute bottom-line price below which it cannot sell.

Back in less enlightened times the ball used to overshoot on both ends – either flying up into the air on the upside or boring deep below ground level. The great mystery of Sisyphus was why he didn’t give up. Surely after the big round ball had fallen down the hill for the 100th time, he would have cut his losses and taken a holiday?

No, he picked himself up and had another go. Old Sis was the original eternal optimist.

Reinsurers are Sisyphean in their belief that the sunny uplands are attainable.

Or if not sunny uplands, at least a place with a semblance of the stability that will allow them to consistently produce returns that are commensurate with their cost of capital and the volatility of their earnings.

They say that with all the new ladders, chocks and levers that ILS and clever tech are giving them, they have a better chance than ever of making it to the promised land.

Sorry, everyone – you may not make your cost of capital again this year.

I hope your investors are okay with that.

Maybe their optimism is not as eternal as yours? Maybe it is all too finite?

There is only one way of finding out – and she’s called Florence.

To read the third of our daily issues from Monte Carlo, please click here.