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At the same time, industrial, commercial clients want to transfer their balance sheet volatility to the professionals who are supposed to handle such volatility, Mr. Mahoney said.

"The fundamental question is, are the people who are providing the capital to the insurance companies and the reinsurance companies, really prepared to take on that volatility?"

Increasingly, he said, the answer is, no.

Mr. Mahoney speculated that, as a result, the insurance and reinsurance industries are retreating from risk because industry shareholders dont want the volatility either.

Could such a dynamic lead to a fundamental change in cycles and, perhaps, less pronounced dips and peaks in pricing?

Charles Cantlay, deputy chairman of Aon Limiteds U.K. reinsurance group in London, described it less as a retreat from risk and more a retreat from volatility.

A retreat from volatility is different from a retreat from risk, because the one thing that shareholders dont want is volatility and the reinsurance market can give enormous volatility, he said.

The industry has experienced an unbelievable run of catastrophe losses, the worst stock market for many years and problems with underreserving for asbestosis and environmental, he said. He called it the industrys "Perfect Storm."

Insurers and reinsurers are sailing along in the sea "and whichever way you look, theyre being smacked by the worst possible combination of eventualities," Mr. Cantlay continued.

"Therefore I think companies are looking to re-balance their portfolios and/or make them more transparent, in an effort, as much as they, can to reduce that volatility a bit," he continued.

He expected that the firm market prices would last through the end of 2003. "Theres a lot going on out there in terms of depleted reserves, which is a pretty strong barrier because people need money badly to pay for the sins of the past," he said.

David Robb, executive vice president, for the Hartford in Hartford, Conn., said people have talked about the "end of the cycle" in years past. "The availability of capacity, the ease of entry and the competitive nature of the market makes the hard part of the cycle less spikey than it was in the mid-1980s for example," he said. However, he said he did not know if there was protection on the downside, "to keep the trough from getting deep again."

"That really is underwriting and management skill that enables companies to avoid the very low parts of it," Mr. Robb said. "But as an industry, Im not so sure I believe that weve smoothed out both the tops and the bottoms of [those cycles] weve seen over time."

Henry Keeling, CEO of XL Re Limited in London, said he believes this is, probably has always been and always will be a cyclical market. "I think people who believe otherwise are probably deluding themselves," he said.

However, the situation the industry is facing at the moment, with legacy exposures and the investment climate, is likely to lengthen the period for hard market rates, he said.

Fewer peaks and troughs? "I would like to think that there will be fewer peaks or [that] the peaks and troughs will not be as severe as they have been in the past," he said.

"I think it is likely to happen, but I do believe that the market will continue to be cyclical. Tell me one economic market that is not cyclical in nature. Why should insurance or reinsurance ultimately be any different?" Mr. Keeling questioned.

Mark Lescault at Swiss Re, hoped for a structural change for the industry.

"Underwriting discipline is critically important," he said, noting that the industry has certainly got weakened balance sheets.

"The environment we work in with low interest rates, low investment returns, makes it critical that were able to produce an underwriting profit to be able to produce adequate returns," he said.

"Not only are balance sheets weakened, but theres a lot of discussion about reserve deficiencies in the industry overall, which means that were going to need to continue to produce positive underwriting results in order to do our job," he said.

Mr. Lescault said the current hard market has to last more than a few years. With all the problems in the industry, as well as the fact that loss costs are continuing to rise, he said, the industry needs to maintain the discipline of a strong rating environment.

"It doesnt mean that rates have to go up 25 or 50 percent every year. It means that rates need to remain at an adequate level," he affirmed.

"I think theres going to be a lot of pressure on the managements of every company to do that," he said. "And its the right thing because then we provide better consistency to the consumers, where we actually match the price of the product to a reasonable expectation of what the loss is," he said.

Theres a difference

between "retreating

from risk" and

"retreating from

volatility," one

expert contends

Reproduced from National Underwriter Edition, February 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.