Dear Friend,

Here’s what’s happening in the market right now:

No-one is renewing their treaties yet.

The soft market is continuing in casualty lines.

Some big facultative property programmes incepting before 1/1 are getting 20% discounts.

Fitch and AM Best have warned that the market is patchy and any hardening of rates may not last for long, even in loss-affected areas.

And this is what it means:

Who would be a buyer today? With the first AM Best-rated class of 2005 players formally opening their doors this week and next, it is well worth waiting to see if they are going to be followers or leaders. No deal is better than a bad deal — and this year it might be worth giving the underwriting team the first couple of weeks in January off to make sure you are not at a competitive disadvantage.

Either this is proof that the famous reinsurance “pot” from which all claims are eventually paid is actually segmented and fractured into many smaller “pots”. And why shouldn’t it be so? After all, this is evidence of that greater financial flexibility, sophistication and resilience that the industry has been striving to achieve for so long.

Either that or hard market cheerleaders would say it is evidence of a “silo mentality” and a denial in some sectors of the enormity of the loss that Katrina and others represent. In this case it is down to the treaty renewal to set the tone for 2006. We will see.

The human factor is alive and well. Some underwriters are evidently rolling the dice on a headlong charge to book hefty fourth-quarter income. They are trying to make 2005 look like a better year than it would otherwise have been. Good brokers are taking advantage of this.

Great minds think alike!

Cancel the skiing holiday, it’s going to be a long, nail-biting renewal season, which might not end properly until February.

Dear Friend,

Here’s a reinsurance joke for you:

Underwriter A says to underwriter B, who he has reinsured; “I’m not paying your claims because I think you’re a useless underwriter and all those claims would never have happened if I’d been in charge”

Underwriter B says to Underwriter A “Hang on a minute, if I’m a useless underwriter — surely that makes you just as useless as me for reinsuring me in the first place”

Underwriter A: “Oh, actually I hadn’t thought of it like that — I think I’d better pay up after all!”

I’m sorry it’s not very funny — but it does go some way to parodying a very important reinsurance test case that has reached a significant judgement.

A great victory for common sense was achieved yesterday when a judgement was handed down from the UK court of appeal in the infamous “AON-77” cover case.

I’m not going to repeat the tedious and complicated details of the case itself — I’ll leave that to your lawyers and compliance departments, who will doubtless be circulating many reports on the subject over the nest few weeks.

But the nub of the dispute was to what extent a reinsured had a duty to protect the interests of his reinsurers. And the final answer is “no, not really — there is nothing wrong with taking advantage of an advantageous contract”.

Quite right too! The only person who is qualified to look out for a reinsurer’s interests is the reinsurer himself.

If we can all start retrospectively avoiding claims because we don’t believe the primary underwriter has been doing a great job, the whole basis of the reinsurance business would collapse. Claims happen — they are not evidence of underwriting failure.

What if the reinsurers in this case found had their retrocessionaires unwilling to pay, citing the same reasons for avoidance as they had tried with their own client? What possible argument could they use to effect a recovery?

An earlier judgement had tried to draw a distinction between when a contract is proportional and non-proportional, saying that for XL deals, reinsurers should expect a lower duty of care from a reinsured than when they’re in a quota-share partnership — but this appeal ruling has blown that distinction out of the water too.

As I keep saying, reinsurance only works as a partnership. So, choose your partners with extreme care!

After all, it’s in your interests — and no-one is holding a gun to your head, forcing you to underwrite business that you are not happy with. If you don’t like suffering from contracts that are too advantageous to your clients, don’t sign up to them.

And if you want more underwriting control of the underlying business — start demanding it!

Dear Friend,

The news just keeps coming — just trying to keep up with the sheer volume of it all and making sure that we’re reporting everything accurately means I’ve hardly had time to think what I’m going to write to you today.

But one thing in particular stood out from the flurry of capital raisings, takeovers and start-ups. In amongst the bundle of optimistic, forward looking statements came a very important warning from Partner Re’s 2006 outlook.

Read what Patrick Thiele, Partner’s CEO has to say (and weep):

“The reinsurance market remains competitive with substantial price increases only in those lines that were directly affected by the numerous catastrophes of 2005.”

So, there is more than one “pot” after all… but hang on, it gets a lot worse:

“Certain lines and markets that were not affected by those major catastrophes, including Asia , portions of Europe and selected specialty lines, are increasingly competitive”

So, the soft market continues in many lines and territories…

“In addition, many cedants continue to increase their net retentions and are moving from quota share to excess of loss coverages, reducing the amount of premium in the reinsurance marketplace.”

...and demand is at best static or more likely falling – so no get-out clause there.

Why should we doubt Mr Thiele’s sincerity? After all he has built a highly successful global diversified reinsurer from scratch and his only interest should be in talking the market up along with everyone else.

As you, long-suffering reader, are no doubt aware by now, I don’t buy into the theory that single events can change market cycles. Reinsurance is certainly a business that doesn’t correlate with other financial markets, but it cannot exist in a pristine vacuum, wholly isolated from the wider financial world.

And right now the world is awash with money and this is showing up in asset inflation across the developed world. Be it housing, stocks, bonds or commodities, prices are up, up, up and risk premiums are at historical lows.

So if the pricing of risk in the pure financial world is near rock-bottom, why should the price of pure risks such as catastrophe reinsurance be allowed to run at a premium for long?

No wonder investors will jump on anything that looks like it has a good chance of making a decent return. We’ve got twelve start-ups and counting — we wish them all good luck — but this time we suspect that they are really going to need it.