While some companies “limbo dance” their way to lower rates, others are increasingly concerned with a traditional sense of discipline, as Gavin Coull explains.

Like a Victorian educationalist, talk in the coffee shops around Lloyd’s is concerned with what to do about the “three Rs”, save that the “Rs” in question are Rates, Rating and Results. There is a sense that, as with the urchins of old, a return to strict discipline and methodology are required in order to lift the soul to visions of a brighter future. Without a doubt, rates are and remain low, with a sense that without a major catalyst the market is not going to change direction for some time. Conversely, certain market players seem intent on limbo dancing their rates ever lower, in a bid to not only undercut rivals, but to do so by offering discounted rates even on marginal at best business; witness the horror story of one July renewal where despite offering a rate cut of 10% to retain the client, one underwriter found himself outbid by a new player who offered a reduction of nearly 80% of expiring. Against the backdrop of ever closer rating scrutiny, where rating agencies themselves are being placed under the microscope after seemingly misreading (or were they mislead?) the run-up to the credit crunch, strong and provable financials and business practices demonstrating a long-term stability and viability are in demand, rather than short-term raiding parties for new business at unfeasibly uneconomic rates. With little to differentiate many of the deals on offer in a climate of scepticism towards financial markets, strong and consistent ratings may well become one of the key differentiators moving forward. The coalescence of credit crunch in the financial markets with the reduced premium base leads one naturally to the third R, Results. Recent weeks have seen a string of Q2 results showing up to 50% decline, compared to like-for-like Q2 2007 results, across a range of major international players. The pressure to perform for investors and capital providers may lead the unwary (as with Mr 80% above) to move into the game of trying something new or “innovative”, or to underwrite classes without real experience, and then cross every finger and toe that premium volume will justify the approach. History will of course show whether this leads to a bright future, or whether our Victorian forebears, with their focus on discipline, were correct.

Gavin Coull is partner in the insurance/reinsurance practice of law firm Steptoe and Johnson.