Dear friend,

I had a good chat with Grahame Chilton of this morning following the release of Benfield’s Global Reinsurance Market Review

It’s a brilliant piece of research — I spent most of yesterday reading it up and I suggest you do too. There’s some really juicy analysis in here, which I’ll be coming back to over the next few weeks.

But in the meantime – let’s hear from the boss of one of the world’s elite group of global reinsurance brokers…

Mark Geoghegan (MG). What is the chance of the market easing you describe in the report turning into a rout as the year progresses?

Grahame Chilton (GC) Last year people were coming to terms with the tremendous claims caused by Katrina, Rita and Wilma and hadn’t had a chance to readjust their book or to raise as much new capital as they may have needed. Therefore it was a very fraught renewal season.

But it was a much calmer market at this 1/1, people were more relaxed, they weren’t clamouring for coverage. So what did that translate into for each individual market?

In international side there was undoubtedly price competition due to some reinsurers trying to maintain market share and other reinsurers trying to get in for diversification reasons.

This lead to a very competitive price environment, albeit with a fair amount of price discipline. So there was price reduction, although disciplined price reduction.

In the US you had a situation on property cat where prices did pay up, but not quite to the level that people had been saying the were going to after what happened in the middle of last year.

MG Do you think that this means that the window of opportunity for start-ups is now closing?

GC I always believe that there is an opportunity for high quality businesses to start at any time — however, to a certain extent the opportunity to come out of the box as a straight property cat monoline reinsurer is pretty difficult. And in certain other lines there is a pricing slide, so it’s not what you’d call a great time to be doing it, because to a certain extent the opportunities are less than they were twelve months ago.

MG So as a top reinsurance broker what would you say to a company like Ironshore, that is going to be writing direct US Cat insurance on a fully net basis?

GC At the end of the day I wouldn’t be saying anything to them! They have raised the capital and have obviously put a business case to the investors. Bob Clements has had a tremendous track record of starting up Bermudian companies at times of need. So I would not be so presumptuous as to comment.

They’re looking at a very specific area of still potential need, with a leading market trader who is well known to be a profit hunter in that arena. That’s more of a specialty niche play rather than a general commentary on the state of the market as a whole. I do think that there are still opportunities for good high quality niche players to do start-ups, so it’s totally in line with what we see.

MG What do you think of Marsh’s recent return to the fray with the launch of the new MaRI-ACE primary capacity?

GC It looks to be remarkably like what we did on Starbound in the middle of the year, other than the fact that they probably had to put a very large bet in themselves to get it away. I can’t really comment on a Marsh product, but it’s a bit ‘same as’ some of the products we’ve been doing over the past couple of years. They’ve obviously got their reasons for the timing — but it would have been a lot more useful to their customers if they’d had it last year rather than this year.

MG What chance do you think the soon to be launched Nymex-CME ‘Re-Ex Index’ contracts have of succeeding?

GC I don’t particularly agree with the way it’s being done. It seems to be raking up an idea we had about 15 years ago and trying to make it a new idea. I think the world’s moved on since then.

MG But do you think there is a way of marrying the insurance business with the speculative futures trading markets?

GC Of course there is — at the end of the day a derivative is about taking a risk and therefore finding a ways of taking an understandable risk and having a metric around that is an obvious consequence of where the market was going. I’m not sure that coming up with an index is the solution. There is obviously a lot of action going on in those market but that particular bit of news was an old Benfield idea revamped fifteen years later.

Undoubtedly there will be derivatives trading — because to a certain extent that is what the insurance business is — a promise to pay for something in the future.

MG How do you see the year progressing — how do you see the cycle in 2007?
GC With the new capital that is flowing in, it doesn’t mean that cycles are going away, but the oscillation of those cycles should be milder, because that new capital can withdraw if the pricing isn’t there, whereas if its already wrapped up into forming the capital base of a reinsurer it’s more difficult to take your toys away.