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.