Hard (adj., usually `~ market'). Most of the world thinks `hard' means difficult, and therefore the word is usually used to describe something bad, or at least challenging. But for reinsurers, hard means good, especially when it describes the market. Hard markets are easy, rather than difficult, because premiums flow in at much greater quanta. As a result, underwriters can be choosy, rather than concerned that insufficient premium exists for them to justify, say, the continued existence of the Sao Paulo office.

In hard markets everyone is happy (or at least they should be, the buyers notwithstanding), because at last the amount of premium that reinsurers can charge successfully for their risk transfer products is likely to exceed the amount of claims. Yet happiness does not always accompany hard markets. This is in part because, ironically, the non-hard stages predominate the reinsurance pricing cycle, during which times reinsurers sell their products for less than their cost. Hard times (for reinsurers, the good times) are often not sufficient to make up for the soft-touch disposition they reveal the rest of the time. Thus for some, desperation is a more common hard market emotion.

It works like this. The excess of premiums over claims achieved during hard markets is used by reinsurers to rebuild balance sheets damaged during preceding `soft markets'. It also provides an opportunity to build up `equalisation reserves' that can be spent during future soft markets, allowing reinsurers to pay dividends even in years when they lost money hand over fist. These are fundamental characteristics of the reinsurance sector's standard and somewhat confused business model, which appears to be based on a misapplication of Keynesian economic theory.

The approach would work if hard markets outnumbered soft in number or duration, but alas the ratio of hard- to soft-market years is about two to one in favour of the soft. Like hurricanes in Hertford, Hereford and Hampshire Heath, hard markets hardly happen, so most reinsurance professionals (even those with staying power) will enjoy only three, or at most four, hard markets during their careers. So, as reinsurers wait like Vladimir and Estragon for the approach of the hard-market saviour, they have an alarming tendency to succumb to their soft-market indulgences and fail.

At present the market is hard, although it may be soft again by the end of this sentence. For while reinsurers like hard reinsurance markets, insurance companies clearly do not. When the reinsurance market is hard but insurers have suffered hardly a hurricane in the previous year, they tend to feel that reinsurance is too expensive. An expectation builds that reinsurers ought to lower their rates once again, to levels which recognise the insurers' recent good record. When this happens, the soft market begins to encroach.

Alas, the no-claims defence is becoming more common as summer wanes. Reinsurers faced with this argument should reply with something incomprehensibly technical, such as: "Sorry, our modeling of the GEV distributions - also known as the Frechet, Weibull and Gumbel models - for your portfolio proved to us that the range of extremes, particularly the distribution of excesses over an extreme threshold, requires a significant uplift in the premium this year." An alternative is to quaff a stiff gin and remark: "Well, nobody expected the Spanish Inquisition, did they?"

Hard markets are usually accompanied by a bluster of such hard talk from reinsurers. They assert their insistence on selecting only the most attractive reinsurance risks and on improving cedants' front-line risk analysis, they demand increased data resolution, and most important of all, they pledge that they will achieve the correct `technical' price (as opposed, perhaps, to the soft-market `right' price, which is vulnerable to somewhat greater subjective pressure, usually downwards). Hard talk usually lingers longer than hard markets, however, as resolve weakens in the face of shrinking market share. For inevitably a competitor is willing to be a little less demanding, causing the overall hard-market resolve to ebb, leaving only the talk.

This illustrates another basic: the duration of a hard market is dependent upon supply and demand. However, both supply and demand are also influenced by hardness. In hard markets, insurers often retain more risk, believing (rightly or wrongly) that to do so is cheaper than buying hard market reinsurance. The practice has a tendency to reduce demand. Yet if the market is hard it often forces insurers to put their own prices up, giving rise to the need for more risk capital to support the risk they assume (because regulators consistently but erroneously believe that premium is a proxy for risk). The easy way to more risk capital is more reinsurance, which increases demand. This contradiction means that supply has a bigger influence. Hard markets also have a tendency to invite new, hard-nosed competition, affecting the supply side of the equation and, predictably, inviting the resurgence of the soft market. And that problem, more than any other, is the hard part.