Would You Believe 2010?: Lloyds Underwriter

The historical patterns for insurance cycles, he affirmed, were the same for Hurricane Betsy, which hit Florida in 1965; Cyclone Tracey, which ravaged Australia in 1974; Hurricane Alicia, which swept the coast of Texas in 1983; and Hurricane Andrew in 1992.

After each event, the classic scenario took place where rates went up, profits were made, new capacity came in, rates came down and losses were made, he said, noting that each cycle takes about nine years to hit the bottom before a catastrophe heralds a hard market.

It wasnt the cost of the catastrophes that led to a market change, he emphasized. But they each represented the straw that broke the camels back.

The mathematical sequence for the insurance cycle maintained its purity until the tragic events of Sept 11, 2001, he said. Historical evidence, then, would, in fact, put the bottom of the current cycle in 2010, he said.

Mr. Carrier said there are new features associated within the current environment that may lead to a more prolonged hard market, emphasizing, however, that he didnt want to suggest that the soft market would never returnhuman nature being what it is.

Mr. Carrier saw four features bringing a new dynamic to the current hard market: interest rates at an all-time low; an economic outlook marked by global instability and the constant threat of terror; the fact that the World Trade Center loss is only partly paid; and corporate governance issues.

Although most windstorm catastrophes are paid within a year and earthquakes within two years, the World Trade Center loss is still only two-thirds paid. "The slow payment of this peculiar loss means that I fear more bad news is still to come," he said, explaining that the issue of bad reinsurance debt has not been fully recognized.

"I do think there are companies that are assuming that 100 percent of all their reinsurance recoveries are absolute, when in actual fact, they may not be there." This creates an air of uncertainty that will help maintain hard underwriting conditions around the world, he said.

As for corporate governance issues, he predicted that after the financial scandals of Enron and WorldCom, tougher supervisory oversight will hinder the arrival of the next soft market.

For example, he said, "Companies can no longer boost their reserves on the basis of what they can afford to pay." Instead, "those reserves must be true and fair, and chief executives and finance directors are personally accountable for their validity."

As an underwriter at Lloyds, "I seem to be filling in forms constantly and certainly it does dampen the entrepreneurial spirit of an underwriter," he said. "But perhaps more importantly, it forces transparency in ones underwriting."

At Lloyds, one line of profitable business will no longer be used to subsidize a loss making line of business, he said, as an example. "This discipline must surely be an impediment to the entry of innocent capital that will lead to the next soft market," he said.

Reproduced from National Underwriter Edition, June 23, 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.