These prescient words above appeared not in the past few weeks, but almost seven years ago in The Economist magazine. The wheel continues turning for the reinsurance sector, but it appears certain sectors of the industry insist on reinventing it. However, the cycle appears to be at its peak; rates across the board are increasing, in certain cases by up to 300%, while conditions are tightening. For many commentators this has come not a moment too soon. Ratings agencies have been warning they are expecting to make sweeping cuts in reinsurers' security ratings next year, as poor results and the demand to strengthen reserves kick into bottom line results.
Reinsurers, unable to parry the double whammy of last year's late December European storms and the multi-year products bought to smooth the transition over Y2K, are now grabbing the helm. The predicted upturn in the reinsurance sector, prompted not just by rising loss ratios but also by major withdrawals from the retrocession market, may also trigger an increase in the uptake of capital markets-derived products. For several years, ART has been championed as the new way forward, but cheap reinsurance has stifled its growth. Nevertheless, ART-inspired players have been entering the market - notably Max Re, Imagine Group and Tokio Millennium Re - and are poised to jump in where others tread tentatively. Capital markets players are already seeing a deluge of enquiries about their products, and expect the floodgates to open once the January renewals have closed.
In fact, it is not just the new players that are offering ART products. In September, XL Capital announced it had set up Element Re to provide weather risk management insurance, reinsurance and financial products, while the major names in investment banking have set up reinsurance subsidiaries to provide capital markets-inspired solutions to insurance-type problems. Whether these new offerings - effectively new capacity into the marketplace - will limit both the height and the length of the market upturn is a point under debate.
At the same time, the re/insurance industry continues to come to terms with e-commerce and the possibilities it offers. This month's roundtable reaches the conclusion that although primary business, particularly on the high volume side, benefits from website offerings, the same cannot be said of the reinsurance sector. However, where technology can make a difference is in cutting costs and speeding up processes - though the potential security problems of trading through e-commerce facilities remains a major worry. Conversely, re/insurers have so far found it nigh on impossible to design products covering cyberliability, not least because assessing the potential maximum exposure has proved an elusive task.
In the meantime, while certain European governments view the worldwide web as the Wild West of the 21st century, they are taking a firmer line with traditional businesses. In the autumn, the European Commission adopted a proposal for a directive on insurance mediation which should open up business in any EU country to brokers located in an EU member state, through freedom of services. Although this proposal has been welcomed by the European broking community, other proposals for pan-European regulation of reinsurers is meeting with less enthusiasm. Downright condemnation is being poured on the British government for moves in this year's Finance Act which could lead to changes in the tax treatment of discounted reserves - and not to the benefit of the re/insurer. The Inland Revenue issued draft regulations in late November, with a consultation period due to close at the end of January.
A more positive political note was struck recently in India when the government finally issued the first licenses for foreign participants in the recently deregulated domestic market. Terms had changed since insurance liberalisation was first mooted, and foreign partners are allowed a maximum 26% shareholding in any company conducting business in the country. Despite India being viewed as one of the two jewels in Asia's crown - at least as far as international re/insurers are concerned - several interested parties have decided the terms are too onerous to justify the investment, at least for now.
As capacity contracts elsewhere and business looks more profitable in traditional markets and lines, this may prove a worthwhile strategy, at least in the short term as old-style opportunities raise their heads.
Sarah Goddard, editor of Global Reinsurance magazine.