Dear Friend,

Maybe I’m just repeating an incumbent player’s fantasy — but who’d want to be a class of 2005 player trying to make a living in today’s market?

People only seem to want you to write stressed business in the Gulf of Mexico . Of course, Gulf of Mexico business is looking great on paper, with about half the cover being sold for at least double the price, but the weather forecast looks pretty rotten for next summer.

The sea hasn’t begun to cool down — and there was even a tropical disturbance (one notch below a depression) down in the Caribbean last week. At this rate a full-blown hurricane in May wouldn’t surprise anyone. And if the big wind blows, no amount of wordings tightening is going to make any difference — a total loss is a total loss.

Lloyd’s US windstorm realistic disaster scenarios are going to be upgraded to $100bn insured loss events — that’s an eye-popping 42% increase from the previous $70bn. Where Lloyd’s leads, others tend to follow — if the new number became an industry consensus, what would that do to your projected rate of return?

And that guy from the ratings agency is coming next week — how happy is he going with the shape of your book as it stands? How long is he going to give you to diversify before asking you to raise more capital?

And if you need to raise more capital what are you going to tell your investors?

I’m heading off to Bermuda for the World Insurance Forum in a few week’s time — maybe I’ll get to ask my big questions then.

Dear Friend,

I just can’t stop thinking about this renewal season. Like an annoying song overheard on the radio — I don’t much like it, but I can’t quite get it out of my head.

Just as a quick recap — this is what everyone agrees on:

It’s like a world divided into two enormous Cresta zones:

Zone 1. Gulf of Mexico Cat – big rate rises, tight capacity and terms and conditions that would make Genghis Khan blush.

Zone 2. Everywhere else – not so big rate rises, or flat, or even rate cuts, i.e. business as usual depending on individual loss records and/or how far away you are, geographically or psychologically, from Zone 1.

The two explanations on offer are:

1. “You ’aint seen nothing yet. The reason why this renewal season went with a whimper rather than a good old-fashioned bang was that the full and final consequences of the recalibration of catastrophe models and capital requirements haven’t yet been fully appreciated. There has been an unseemly dash to diversify from some players — and this has held prices down away from the perceived danger zone. But these guys are wrong:— wind and flood are global — are you telling me the wind doesn’t blow in Europe ?

“The Gulf of Mexico is just the beginning — just you wait until the ratings agencies and modellers apply what they’ve learned in the Gulf into European winter storms, or Asian typhoons, or whatever. There’s going to be a long hard squeeze on capital and I need to start charging more across the board right now. Only the tough guys will survive the coming shakeout.” Or words to that effect.

I call this the “slow motion disaster” camp. Here’s the other view:

2. “Given the benefit of hindsight, rates in the Gulf of Mexico were completely wrong and accumulation controls and models were once again shown to be inadequate. But that doesn’t mean that rates in the rest of the world are automatically wrong too — in fact the bottom line is we’re more than happy with rates and don’t mind competing for this business. We also need the diversity otherwise we’re going to get hammered by the ratings agencies”.

I call these the dove camp.

Which camp am I? Actually it doesn’t matter. Markets aren’t driven by rhetoric and posturing, but by what underwriters do when faced with the prospect of losing business and what customers do when faced with the prospect of losing cover that they want. Both can walk away — but given a historical perspective only one of them can subsequently claim they were right to do what they did when they did it.

The only trouble this year is that the “slow motion disaster” underwriters are in for a reality check. You can’t decline renewal as expiry business that you were perfectly happy to give a discount to last year.

That lost business isn’t coming back for a long while. Clients take years to forgive that sort of unprovoked aggression and usually extract sweet revenge in the form of rate cuts and terms and condition sweeteners if they do eventually come back.

The result of this renewal is that the slow-mo camp are going into 2006 with books that are less well balanced than last year. One does wonder if this is wise — have they not seen the weather forecast for the Gulf of Mexico next year?

The art of successful underwriting involves the patience of a saint and the wisdom of Solomon. And the moral for 2006 must be — be more patient; be more wise.

Dear Friend,

If you’re a superstitious person and are wary of underwriting anything today, Friday 13th, for fear of it immediately sinking, crashing, burning or being hit by a natural catastrophe – here’s something that will be of interest.

Over in Spain they are superstitious of Tuesday 13th (or martes trece as they say down there).

So logically there are four possibilities: —

1. We can’t both be right and therefore all superstitions are nonsense.

2. We’re wrong and they’re right, in which case, fill your boots today, but beware the 13th of June.

3. They’re wrong and we’re right — have a long lunch and take the rest of the afternoon off.

4. We are both right and the world is twice as dangerous as we first thought — a truly frightening prospect.

The last scenario looks suspiciously close to what has happened to the way Gulf of Mexico exposures have been rated this year.

It seems for the unlucky inhabitants of that sub-tropical coastline, we have suddenly decided that from now on every day is an unlucky day and that rates are going to have to multiply.

But for the rest of the world, any combination of the first three scenarios can apply. In some places across the board reductions are still being applied, and everywhere else the ebb and flow of claims cost and supply and demand are alternately putting underwriters and customers on top in the bargaining power stakes.

So much for an across-the-board hard market.

It seems that in this market, as in life, personal judgement, gut feeling and even superstition still have an important role to play.

Dear friend,

The ink is drying on another renewal season and the picture is as patchy and fragmented as I predicted before the end of the year. Rates are up and conditions are tight in all the obvious and logical places they should be up and tight, but are going nowhere or increasing minimally in non-loss-affected lines.

At the end of the year I had a little chat with myself about what indicator I would use to define for myself whether we were in a proper hard market.

The barometer I eventually settled on was the Spanish market.

Of course this is a market I know extremely well, being the bearer of over seven years’ worth of scars to prove it. But the Iberian market is a good bellwether because the Government-backed “Consorcio” strips out natural catastrophes and terrorism, which makes it as uncorrelated with the Gulf of Mexico as is possible to contrive.

The Spanish market is also extremely competitive — so I thought that if reinsurers could force up prices here, they could force them up anywhere.

And the result? My Spanish barometer is calling a no-score draw — a dead heat. It’s renewal as expiry and everyone’s happy (for the time being at least).

So if a “rising tide” fails to lift all ships, then surely the logical conclusion is that the tide in question is not, in fact “rising”— which is a roundabout way of saying that we don’t have a proper hard market on our hands.

The whole situation reminds me of my six-monthly check-ups at the dentist as a young child. My older brother and I always used to go along together in an odd-ball pairing. I had been blessed with healthy teeth and his were pretty awful.

The dentist always asked the slightly sinister question “who’s going first?” with a bloodthirsty glint in his eye. I always put up my hand immediately and my brother always pretended not to hear him, wondering if he could make a bolt for the door before my mother caught him.

Two minutes later, when the dentist was finished admiring my pristine gnashers and I was given the all clear, I would always sidle up to my brother, summoning up my most irritatingly smug tone of voice and say “No fillings for me” as he turned increasingly pale.

Well, it’s no fillings for Marcos, or Pedro, or Pepe.

Pah — Katrina — that didn’t hurt!