It is somehow appropriate that Global Reinsurance is focusing on what's happening on the legal side of the industry just as the World Trade Center case is being deliberated in New York

The current case is keeping reporters camped outside the courthouse and commentators trying to second guess the final decision. From the lawyers' point of view, however, this would appear to be the beginning of the end of the WTC-related casework.

Many have commented that most of the September 11 workload is now all but complete, though there appears to have been somewhat of a change in the general attitude of re/insurers which is keeping lawyers busy. "In particular, the heavy duty mainstream reinsurers are trying to become more attentive to procedures, cost control and saving money," commented Peter Sharp, managing partner in the London office of LeBoeuf, Lamb, Greene & MacRae. This cost control mentality can be a double-edged sword for legal services providers: on the one hand, save legal fees by coming to some sort of settlement or using arbitration or mediation techniques; on the other, litigating sooner may save money later.

This is particularly true when the market is at the zenith of the cycle, as would appear to have been the case in the recent past. When premiums are high, money is more readily available and reinsurers are given the option of fighting with all their might or doing a more generous deal in order to make a problem going away.

Downcycle arrives

From the latest swathe of reports and analyses brought out in time to hit last month's RIMS conference in San Diego, it looks like the downcycle is well and truly here. Broker Aon's 2004 US Property Report described it thus: "Sometime during the first half of 2003, it's difficult to pinpoint exactly on what day, the latest US property insurance market wave reached its crest... Based on the trends of 2003 and the economics of the property insurance business, we believe that barring significant natural or man-made catastrophes, this latest market wave will continue to recede and produce an environment yet more favourable to policyholders in 2004." Aon expects the commercial insurance market to follow suit.

Frank Coyne, President and CEO of the Insurance Services Office (ISO), concurred with this view, telling RIMS delegates that "rate increases have been losing steam, dwindling last September to less than half of what they were at their peak." He noted the stark figures surrounding the business. "The good news for insurers is that their rate of return for 2003 was more than eight times their rate of return in 2002. The bad news is that their rate of return for 2003 was just 9.4% - not a lot of profit for assuming all the risk inherent in their business. Indeed, if anything is remarkable about the state of the insurance markets, it's the signs that the next soft market may be approaching - even though insurers' rate of return was just 9.4% in 2003."

Such prognostications are likely to have been the catalyst for the subject matter of James Schiro's opening address to RIMS delegates. The CEO of Zurich Financial Services exhorted the re/insurance community to manage the cycle. "I believe it is fair to say that the industry has learned an important lesson from the recent cycle. The tools for better asset and liability management are being implemented more widely. They are integrated in a comprehensive risk management approach that also includes our customers... The building blocks are in place for a better business model, one that may help us to break out of the stark cyclicality of the past." The sentiment is good and pure, but as ever, it is whether the re/insurance community can sit on its capital - or even return it to shareholders - when it looks like it won't be making the right return. History so far has proved that for the majority of businesses, those fingers get twitchy, and risks are written which turn round and bite the hand in years to come.

Such, for example, was the experience in certain lines of US casualty business. Although many re/insurers have shored up their reserves for business written in the late 1990s and early 2000s, still asbestos rattles on. Andrew Banfill, managing partner and head of the reinsurance practice group at lawyer Hextalls & Co in New York, thinks it unlikely that the proposed asbestos reform will go ahead in the life of this Congress, and re/insurers are of the opinion that the proposed S2290 will be unworkable.

In a letter sent to Senator Bill Frist last month, AIG, Am-Re, Chubb, Gen Re and Swiss Re said: "After more than a year of countless meetings among stakeholders, we now know that a trust fund approach as proposed in S2290 is fatally flawed and can't be made to work. It can't be both affordable by the insurers and defendants whose contributions would finance the fund, and at the same time sufficiently beneficial to victims and their representatives to warrant their support... We are prepared to work with you and others to try to fashion a more reasonable and politically viable approach that will solve this national crisis."

The industry is poised on a canteen of knife edges - which always spells good future business for the 'pillars of wisdom'.

Sarah Goddard is the editor of Global Reinsurance.