Adrian Leonard is a freelance journalist and editor of this special issue of Global Reinsurance.
Reform, technology, regulation, convergence, and underwriting quality are common themes running through this second IUA Seminar Issue of Global Reinsurance. A variety of contributors have offered a healthy and surprising amount of criticism and advice – and those with significant achievements behind them have resisted the temptation to be self-congratulatory, recognising that the emerging turn in the market cycle is no signal for laurel-resting. This should be well received by Nick Ferrier, who warns that complacency is the London market's greatest threat; reassuringly, the other contributors to this issue display little of it.
David Holmes points out that the market is very different than it was 20 years ago. Yet the past few months have seen a remarkable replay of events that linger all too largely in the minds of London market practitioners: an oil rig suffers an explosion and sinks, wiping out years of the energy market's premium income. Violent windstorms cut swathes across Europe, delivering a surprise to unsuspecting reinsurers. The threat of spiralling claims for asbestos-related disease rears up in the US, where an earthquake rattles the west coast. Another seismic shock shakes Japan; this time, mercifully, both 'quakes left little destruction. As the loss events compound, much of the industry is lodged in an unsustainable cheating phase, waiting with crossed fingers as the tail catches up. Already companies are toppling with increasing frequency.
Yet the market and the global industry are not about to endure a rerun of the early 1990s. Despite the similar confluence of market conditions and loss events, things are very different this time around. Most notable, perhaps, is the all-new phenomenon of a hardening market during a capacity glut. As is so often repeated, reinsurers' capital is in short supply only for the support of poorly-rated risks. The momentous mood-swing over rates at 1/1 was as if reinsurers suddenly, collectively, got religion after years of denying the scripture, but it will not lead to another old-style hard market.
Unspoken consensus on pricing clearly does not equate to the ability of individual underwriters to dictate terms, even in catastrophe retrocession markets: competition remains as fierce as ever. The bulk of opinion in our Executive Survey (page 15) is that the insurance cycle will peak in two years' time, but there can be no doubt that should rates increase to the point they have done in previous cycles, the industry's hundreds of millions of parked capital will be deployed to remove the peaks from the cycle (to the ultimate benefit of all – so long as the potential under-cutters see the sense in taking out the troughs as well).
Underwriting quality is another evolutionary development which will change the way things happen this time around. In this magazine, as in most writing about the London market, its underwriting expertise and willingness to tackle the most difficult risks is noted and praised. Yet that risk appetite has too often been accompanied by a willingness to assume risk for insufficient reward, resulting in billions of dollars of losses for company shareholders, Names, and hapless reinsureds unable to recover valid claims from markets that over extended themselves.
Fortunately this should happen less and less. The London-branch-as-fiefdom mentality is almost completely eradicated, so now few companies operate in isolation from the control and underwriting of their parent. Lloyd's too has heard the word and introduced capital loadings, agency sanctions and even a name-and-shame policy for bottom-performing underwriters. But the internal retrenchment to quality isn't just a London phenomenon: underwriting discipline is being introduced in reinsurance offices around the world, with Asian branches the only notable laggards. At the same time, increased usage of aggregate and catastrophe modelling and other exposure analysis systems should help to ensure that fewer companies go to the wall. Even some Lloyd's agencies are employing actuaries to assist management in their efforts to ensure reserving is adequate.
Writing about e-communication on page 45, Neil Grimston calls for a reality check. Peter Casey, the UK non-life supervisor, provides one in his admission that it would be “quite wrong” for the regulator to aim for a zero-failure supervision regime. Failures happen, and they hurt. Early rumblings from Australia suggest at best a 25-cents-on-the-dollar payout from HIH. Yet individual players, for the most part, are stronger as a result of consolidation, better diversified in terms of their risk (often as a result of proper price and portfolio analysis, rather than simple pot-filling), and thus should be much better able to cope with the catastrophes and claims inflation that have helped to refuel the current cyclical change.
This magazine's exclusive IUA Executive Survey discovered a gloomy market largely unfettered by optimism. There is reason for concern: London's role is changing. As the industry goes into the melting pot and all the rules are changed, this upcycle looks quite different from last time. The strongest and most skilled will survive and thrive. It is apt, then, to appropriate the salutation of Star Trek's Mr Spock as a closing wish for readers: live long, and prosper.