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The cycle - a storm in a tea cup?
Talk last week was all about Hurricane Ivan - will it, won't it hit the US
mainland at full strength - and where will it make landfall. Reinsurers who
were ensconced in the relative safety of Monte Carlo kept track of the hurricane's
progress but the indications were that though this is a big deal for those
companies that operate in the Caribbean/Gulf of Mexico, it will not really
dent the global reinsurance market.
So, barring some other catastrophe, rates will continue to slide and the questions turn to "how much" and "for how long". Apart from Coverium, practically all insurers are reporting bumper results (earned when prices were high) that, with a flat stock market, will encourage others to pile into their shares expecting similar returns in the future. This will put pressure on underwriters to write more business and lead to the classic oversupply that pushes prices lower still. Due to the inherent time lag in insurance results, shareholders (and management for that matter) do not realise they have got it wrong until it is too late - by which time they are haemorrhaging money and then put prices up pronto. And because the events of 11 September drove the whole market upwards, the downturn will drag the whole market with it too.
The solution to this roller-coaster ride? Many from outside the industry believe that because insurance is such an easy market for capital to enter and exit, the only way to tame the cycle is by regulation. Lloyd's has taken the bull by the horns and established the Franchise Board - the rest of the industry is eager to see how successful it is in telling notoriously independent underwriters what they can and cannot write. If Rolf Tolle succeeds in controlling the syndicates' excesses, how long will it be before the Financial Services Authority decides to have a go too? We may then look back on the 'good old days' of the insurance cycle with fondness.
Andrew Holman, Chief Executive, Holman's
