The market has turned. It didn’t take a 9/11 or a Katrina, or even four hurricanes in a row. All that was needed was the virtual collapse of the global economic system and a couple of relatively small hurricanes making landfall in the US.
Re/insurance companies are generally the most conservative of organisations when it comes to their investment portfolios. Fixed-income instruments form the great majority of invested capital. Although companies have lately allowed the percentage of equities in their portfolios to creep upward, in only a few cases does it exceed what accountants call a “material” fraction, i.e. one-tenth.
In the unique conditions of 2008, however, it has not been the ‘wilder’ end of the portfolio that has let the side down, but what had once been considered the most stable investments. Now that the biggest are no longer the best in this year’s topsy-turvy financial markets, such investments prove to have been less prudent than buying work by Damien Hirst.
And yet...these conservative investments may prove to be the re/insurers’ salvation. Losses in the financial markets have been the key element in turning the market around. Doing the right thing turns out to have been right for all the wrong reasons. It’s been that kind of year.
So what does a hard market mean for Bermuda’s re/insurers? Combined with AIG’s problems, it signifies that Christmas has come early. AIG will still write business, but the company’s trials have provided opportunities for its competitors. Business that would have automatically renewed with AIG is now being seen by companies that would not previously have been asked to quote. Some of it will be simply to ensure that AIG’s prices are reasonable, but some, doubtless, will be placed outside AIG.
Every market turn since the mid-1980s has been caused by a different set of circumstances. The only constant seems to be: whatever it is that you’re not expecting is what will happen. Doesn’t that call into question the merits of ERM? A source at a Bermuda financial institution, not a re/insurer, reported that his company had prepared its inventory of dangers, but not weighted them. Thus, the risk of an elevator failure sits alongside the risk of a pandemic, and yet the company takes pride in its ERM process.
What are the odds that the danger that next presents itself to that company won’t be on its list?
