A Hard Market

I feel like a bit of a pretentious ass-clown for blogging so little about the business I work in. As much as I often go on about loving my job, you’d think I’d have something more to offer than cheap theororizing.

And it is really starting to look like the Tohoku EQ could clinch us a hard market.

Most insurers and reinsurers have been forced to accept approximately zero margin over the last year or so because there is so much capital in the market. That means a lower chance of insolvency but also a lower earnings cushion to deal with medium events.

And we’ve had a lot of medium events.

First is New Zealand x 2. There have been two large earthquakes in New Zealand recently, which took everyone by surprise.

Next is Australia, where three sets of floods between December and February also caught everyone by surprise.

Latest, of course, is Japan, which is barely a large event in insurance terms. If Japan had anything like normal private insurance take-up rates, it would have been the biggest event of all time.

In the domestic US, insurers are going to feel the pain of multinational insureds’ claims (think GE or Apple), but realistically, it’s the reinsurers that are screwed. They’re the ones that fund the US catastrophe market by, in part, diversifying into places like Japan, Australia and New Zealand.

With capital in peril, reinsurers are going to scale down their exposure and hope to ride the year out. As it happens, they’ll have a lot of flexibility here because June 1st is a massive renewal date. The US Wind covers all get placed then and the Japanese cat covers have been pushed back while they try to get a handle on the losses there.

Now the wild card. The data from Hurricane Ike has finally been crunched and the top modeling company has just released a new version that crushes Florida reinsurers.

These folks used to get a free lunch by offsetting coastal exposure with inland Florida exposure. Ike, you’ll recall, devastated the midwest, which caused everyone to revise their treatment of the persistence of hurricanes over land.

It’s like finding out your fancy portfolio of leveraged home loan and bank stocks is all one fucking risk. FL reinsurers need a big rethink; prices go up.

So, anticipating this, I’m scouring the earth for capacity (cash) that wants a short-term opportunity for big returns in a very hard reinsurance market. It won’t even last a year, I predict.

Times like these are super exciting for underdog independents like us. All we can really do is grow.

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