Dear Friend,

For a global (re)insurer, a presence in the Lloyd’s market is often seen as a useful investment in R&D. All the major players are there in one form or another, some simply playing a watching brief as rough ideas are rounded into new products and covers.

And for a journalist this simmering cauldron of (re)insurance activity is a great pointer to where future industry trends lie. Add to this the fact that most of the largest Lloyd’s managing agents are quoted on the London stock exchange and are therefore subject to substantial disclosure rules, and our job gets even easier.

This week has proved more illuminating than most. Now is the start of the planning season for the 2007 year and this week has seen three major players reveal what sort of capacity they envisage deploying into next year’s market.

At this early stage, Hiscox is sticking to £833m ($1,524m) for 2007, the same capacity as 2006. Meanwhile Beazley has announced that it expects to increase its level of capacity, albeit extremely marginally (by £30m) for 2007 to £860m ($1,573m). Given the overall state of the market, and the fact that Hiscox has already committed extra funds to the launch of its Bermuda operation, these stances are easy to understand.

But take a look at Kiln and the contrast is stark.

The guys a couple of boxes down the way are really going for it — they’re planning a whopping 25% increase to top their rivals and exceed a billion pounds ($1,830m) capacity for the first time.

What’s more, the lion’s share of the expansion is coming from a 118% increase in capacity for the firm’s catastrophe syndicate to £120m ($219m).

The rationale offered was “on the assumption that 2007 will be a year of moderate catastrophe activity, it will be one offering excellent underwriting opportunities.”

Quite! The great thing about the Lloyd’s market is that it is never one that allows a contrarian opportunity to pass it by. To parody Kiln’s remarks, the global market has talked itself into “the assumption that 2006 and every other year in the near future will be a year of appalling catastrophe activity”.

Well, someone begs to differ, and what’s more, they are willing to put their money where their mouth is. It is amazing to think that this time last year Kiln was planning to reduce overall capacity to £630.5m for 2006 – 12 months later and we’re talking a figure 58% higher than that for 2007.

How refreshing! And what a testament to the flexibility the Lloyd’s platform can still bring.

The sun is in the sky, the stars are in the heavens, and the spirit of Cuthbert Heath is alive and well at Lloyd’s!

Dear Friend,

In darker moments, part of me wonders if our industry is collectively insane.

Look at the evidence:

Our customers get bigger, more sophisticated and more demanding by the day.

We face bigger problems than ever before — be it greater accumulations, higher catastrophic loss frequency or spiralling compensation culture, just where is the good news?

We are realising that we need a lot more capital just to keep our heads above water, yet we don’t seem to be able to offer potential investors any cast-iron assurance on the returns that they can expect.

The public doesn’t know we exist and probably wouldn’t value us even if it did.

The long-term trend of our financial strength ratings has been heading south for a decade or more.

We are facing heavy competition from other risk transfer mechanisms such as Cat bonds

But the lurking optimist in me makes me realise that the reinsurance market always finds a way. This is what the plucky little fella says:

“Of course our customers are getting bigger — the world economy is getting bigger too. And insurance is a boom business — and reinsurance too. Financial services have been growing faster than GDP for as long as anyone can remember — and wait until China, India Brazil and Russia really start developing — you ain’t seen nothing yet!”

“Bigger problems just mean more demand — and in the long term that just means more opportunities and better prices. Provided you sell something everyone wants, you’ll eventually be allowed to charge the right price for it”.

“More accumulations mean more capital and that extra capital needs somewhere to go — enough will always find its way to the right place eventually. If compensation culture gets so bad that a few high-profile players are blown up by it, even the lamest of lame duck politicians will have to do something about it — their public will demand it, especially of their pensions are at risk. And anyway, for the guys left standing, it’s going to be an absolute bonanza!”

“Don’t worry the public with what we do — better they don’t know too much. If they really understood the sort of risks we take on board, they’d never sleep at night.”

“If everyone falls off the ‘A-’ precipice, prices are going to go through the roof! Those left standing will make so much cash, they’ll be triple-A within six months.”

“Cat bonds — easy come, easy go — wait till they have to pay a proper claim — then watch them run away like naughty schoolboys.”

So there you have it — and remember — no-one likes a pessimist!

Dear Friend,

The latest news from the coal face of the Florida Cat renewals is that this is the hardest market since 1993. Or to put it in IPC’s terms, it is the FIRST hard Cat market since 1993!

Admittedly IPC’s definition of a proper hard market is super tough — they only call a market hard when some risks go unplaced no matter what price they are offering.

But what kind of a fool market is one that leaves desperate customers unattended?

Underwriters constantly moan that dastardly brokers always exploit their competitive instincts to make sure they leave money on the table, even in the hardest of markets.

But they are forgetting that a failure to supply is the worst way of leaving money on the table of all.

Surely as long as the business is fundamentally sound and is going to make you good money, you should move heaven and earth to get it done.

Everyone in business knows that if you have a product that costs you a dollar it is much better to sell 20 units for $1.50 than only two at $3.

If I were running a rag doll business and demand for my product was such that I had run out of stock and had customers forming an orderly line around the block just to sign up on the waiting list for delivery, despite my having increased my prices more than once, I would get down to my bankers and ask for the funds to help me ramp up production.

It would certainly not be the cue to shut the factory and lay off the workers!

Yet this is what the market is saying to the customer when it fails to meet demand. It is also another way of admitting that it doesn’t actually know what it is doing.

Have you spotted the problem? Catastrophe Reinsurance is not like a cabbage patch doll. The unit cost of a rag doll are easy to calculate as it depends on labour, transport and the price of textiles, but there is no such thing as correct price in reinsurance because no-one ever knows what the true net cost of the product is. The price is theoretical and is shaped by human judgement — and humans are subject to moodswings.

In fact in the financial world the average human’s sentiment is tempered by relatively short periods in the recent past. For example in real estate markets, it takes less than three years of prices rising consistently for people in large numbers to start to believe that house prices always go up.

Over here, as in most western economies, the global monetary accommodation and explosive credit expansion of the last five years has fed into very strong house-price inflation — but mention to anyone in the UK that house prices have undergone regular five- or six-year downward price slumps over the last 50 years and you will be met but howls of disbelief and derision. And this despite the fact that for five years as recently as the mid-nineties the only talk here was of a housing crisis, mortgage defaults and house repossessions!

The lesson is that events erase memories.

Right now if you can’t get cover for some risks at any price, it is because the market has talked itself into avoiding certain areas instead of trying to charge the right price for the right job.

This is because a battered market has talked itself into expecting another appalling hurricane season with multiple US landfalls as a certainty. Thus many players would rather write business that has a bigger chance of losing them money for the sake of diversity. How foolish is that?

So come on down — don’t keep your customers waiting too long.

Dear Friend,

After one of the wettest and most miserable Mays since George III was on the throne of England, we’ve had a week of sunshine and increasing temperatures over here in London.

The whole country has suddenly put a smile on its face and weekend World Soccer Cup –themed barbecues and beach excursions are being feverishly prepared as the temperatures approach 30 degrees centigrade (85 Fahrenheit).

Due to our unfortunate geographical location at 50 degrees north we in the British Isles receive all North America’s eastern seaboard’s burnt out hurricanes as fast-moving but very wet and miserable Atlantic depressions.

In poor summers these depressions seem to form an orderly line out over the ocean, like jumbo jets coming in to land at Heathrow airport. Some years if you look at the Atlantic weather chart you can almost see a whole ruined summer mapped out in front of you.

I’m no climatologist but I do know that in England last summer was very poor, and so was 2004’s — but 2003 was a real humdinger with record high temperatures recorded not just here but all around northern Europe. Conversely 2004 and 2005 were record hurricane years and 2003 was extremely benign.

So please wish us a good summer here in northern Europe in 2006 and perhaps we won’t have a bad Hurricane season after all, despite what TSR and others warn!

Then again — the summer of 2003 was disastrous for mortality rates for the elderly — especially in France, where senior citizens died of heat stroke in their many thousands. Forest fires also raged across most of the Iberian peninsular and much of the rest of the Mediterranean.

So in insurance, just like everything else in life, it seems there is a macabre bargain to be struck — one man’s meat is another man’s poison. The happy family seaside escapades of your editor and the relief of Gulf and Florida-exposed writers have to be balanced with the woe of European Life offices, property insurers and forestry specialists.

But on financial balance — this year I’m sure the industry would swap a benign Hurricane season for pretty much anything.

So let’s get on with the news and get outside to enjoy the sun while it lasts.