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Certainly seems so, and it may be getting flatter. As with the economy as a whole, it certainly appears that the insurance/reinsurance cycle has some rather considerable soft spots in their rotating devices.
According to the trade press, Willis Group Holdings recently released its annual reinsurance renewals report for July 2008, entitled “Whose Cycle is it Anyway?” Although the study suggests a disparity between insurance and reinsurance pricing levels, the point is that, regardless of the industry, those pricing tires are soft and getting softer based on the current version of the historical battles to make money and retain or increase market share.
Although it may be argued in some quarters that reinsurance pricing levels are more responsible than those in the insurance sector, there is no question that even reinsurance prices have not been immune to the cycle. One possible reason for the heavy competition is that little attention is apparently being paid “to the potential for extreme events,” according to Peter Hearn, CEO of Willis Re. Although one might expect that the Midwest wind and flood losses, as well as the West Coast fires, would put the brakes on the downward rating spiral, such effect is really not much in evidence, perhaps due to the fact that the insured losses from those events have been relatively minimal to date.
What is intriguing, however, and also reflective of the current environment, is the damaging extent to which certain reinsurers have been impacted by their diversifying forays into such arenas as the crop insurance market which is one particular line of business adversely affected by the Midwest flooding.
Other evidence of the flawed perception that the good times continue to roll on for the reinsurance sector, is the apparent slackening of demand for non-traditional products, given the abundant capacity currently prevailing in “traditional” circles and which needs to be deployed or returned to shareholders.
At the same time, a feeling of angst does exist in some quarters, driven in large part by the economic downturn and the seeming disintegration of the credit markets. An example of such concern is the Florida Cat Fund’s purchase (for $224 million) of an obligation to buy $4 billion of bonds by Warren Buffet if Florida’s catastrophe losses exceed $25 billion this season.
So all is not yet right with the world, in perhaps more ways than one, two, or three. It’s hard to know when or if some air will be restored to the cycle’s tires any time soon, but let’s hope that the source of the air won’t be the really big one, two, or three catastrophes.
PAUL |
