Dear friend,

The inevitable always happens. That is why it is inevitable!

But it’s strange how what is inevitable often comes as a shock when it finally does happen.

Houses grow in value at 15% a year for 8 years until nobody can afford them, then they put on a final inexplicable spurt before crashin hard.

Why does it surprise us?

After all, none of us believed that houses were worth what they were selling for, but when prices finally start falling towards a more realistic level, we don’t like it.

Similarly, credit expands at breakneck speed for almost a decade, accelerated further by all sorts of questionable financial engineering. We enjoy the illusion of new-found wealth while this new money spreads throughout a world looking unsuccessfully for a profitable home.

But when no profitable use for the money can be found, leverage unwinds and the inevitable contraction comes, we howl in pain and plead for mercy.

Hilariously, we then make a logical flip and blame the fall of overpriced housing on the credit crunch.

And the next bit is even more perverse — we then plead with our elected representatives to find more and more ridiculous ways of making credit cheaper so that our young first-time buyers can afford the (still overpriced) houses and prop up the market for the rest of us.

It’s all a bit like offering a drunk one last drink to ease his hangover — sooner or later you’re going to either run out of booze or he’ll drop down dead from liver failure.

Neither end result is one that we would recommend.

‘Well’, we tell ourselves, ‘at least our industry is a less perverse no-nonsense sort of place to work.’

Or perhaps it is just perverse in slightly different ways? But that’s one for another day.

After a long period of pressure the inevitable has finally happened in our neck of the woods.

Falling margins in the reinsurance broking sector have lead to a savage round of blood-letting and cost-cutting. And there will probably be more pain to endure before this episode comes to an end. After all, pricing is not turning, the dollar is still weak and demand is still slack.

It may be a shock to the system, but no-one can escape falling margins.

So let’s not make an unedifying prospect of ourselves by making too big a deal about it. We’ve had a good run.

When they start nudging upwards, we can all come out to play again.

But until then I’m afraid it’s economy class — and keep your head down.

Look after yourself.

Dear friend,

Yesterday in London a strong wind blew in off the North Sea (that foreboding stretch of dark water between these fair isles and Scandinavia).

The temperature of the North Sea is barely above freezing at this time of year – come to think of it, it is barely above freezing at any time of the year, so the east wind is a cold one, even if it is usually accompanied by a deceptively clear blue sky and bright sunshine.

We’re lucky that the prevailing wind here is from the much more temperate south west – and we don’t have to contend with this Siberian monster too often.

But I suppose this lulls us into a false sense of security.

As I scurried outside in search of a lunchtime sandwich, the icy breeze blew straight through me. It worked fast.

By the time I got back to the office I wasn’t feeling that great.

And by the evening I managed to nod off halfway through a performance of the Woman In Black, a supposedly terrifying ghost story set as a West End play.

‘Chilling’ read the reviews – but the only chilling I got was another blast from the frozen wastes on my way back to the subway. I had even felt cold inside the theatre, normally a stiflingly hot place at the best of times.

So you may have guessed I am not well in body and am writing this from home as I try to wrap up warm and recover from my aching chills.

But there’s nothing wrong with my mind, I don’t think.

I know that as a journalist I shouldn’t say this, but the news can be such a distraction, that at most times it is best ignored. But some news is genuinely interesting.

The Brazilian market is finally open - after at least 30 years of news stories speculating about when and how this might happen. This is a big deal.

Brazil is an amazing country – and for westerners in many ways it is more amazing and exciting and offers more opportunities than China or India.

It’s a vast democracy with huge natural resources and not too many problems with natural catastrophes (barring the odd tropical storm popping up where it shouldn’t!)

In typical Brazilian style they made us sweat for it (and made this editor look like a fool in the process! But you knew that anyway, dear reader) but pretty soon this market will go from just three to at least thirteen reinsurers.

But now that the place is open - it looks like it’s genuinely open and ready for business with no holding back. These Brazilians know how to party.

And sitting in a northern country that still hasn’t got round to having a spring day this year, I can but fantasise about that other east wind – the one from the South Atlantic, cooling and caressing a sun-kissed tropical Brazilian beach.

No wonder the Brazilian regulators were having trouble processing the applications!

Alex Ferguson writes:
Hello and welcome to the new Brazilian reinsurance market!

Contrary to popular belief, the Brazilian regulatory authorities have decided that their reinsurance market will open THIS week - not in two months' time.

According to insiders, it'll still take "around two months" for everything to get fully up to speed, so if you're Bermudian player PartnerRe, you could be waiting a while for your licence...

Partner, I wouldn't worry though.....it seems as though everyone except the Brazilian national reinsurer IRB, Lloyd's of London and Munich Re Germany (that'll be writing business from this Latin American country solely on a retro basis) will be waiting for licences - unless Brazilian regulatory HQ can turn around faster than a reinsurance broker's Ferrari.

So who's there - or more's the case, wants to be there? AIG, Ace, Allianz, Chubb, Swiss Re, Korean Re, Paris Re, SCOR, Catlin, Mapfre, Transamerica Re, Transatlantic Re and XL have all applied.

Now the waiting is over, we can't wait for reinsurance's Brazilian adventure to begin.

As for us at Reinsurance, see you at the Carnival.

Alex Ferguson

Dear friend,

Hats off to Heritage,who fell into the arms of Argo today - what a track record.

The business floated at 78.5p in August 2006 and a dividend or two later it is going for 160p (154p plus another tasty 6p dividend).

Was this set against the backdrop of a hard market with capacity scarce and easy pickings for those left standing?

No. Quite the opposite.

What other insurance related investment would have allowed you to double your money in 18 months, (despite losing your star underwiter ahead of the IPO)? You'd have to think long and hard.

It's why Lloyd's is still the world capital for (re)insurance entrepereneurs.

To start up on Bermuda these days, you don't much change out of a billion dollars.

But back in London, if you've still got the ear of the members' agents, you're in with a fighting chance.

Long live capitalism!

Dear friend,

Turkeys do not vote for Christmas, and I can't imagine they enjoy Thanksgiving very much.

That is why the NAIC's reaction to the US Treasury proposal to bring in optional federal regulation of insurance is the most predicatable thing since a certain Dr Pavlov decided to ring a bell every time he fed his pooches.

But who knows? Maybe there'll be yet another reprieve?

But to a common sense observer from outside the US - the current 50-state system seems indefensible, especially since across the pond a European Union of 27 disparate member states has cross-boarder insurance and reinsurance rules on its books and is pressing ahead with Solvency II.

Meanwhile the IAIS is looking at global harmonisation of regulations.

And don't forget that the optional federal scheme is just that - optional - if nobody wants it, nobody will opt in!

If I were a small firm that only did business in one state I would certainly not bother, but were I Allstate, State Farm or AIG, a global reinsurer, or a specialty surplus or Fac player I'd be ecstatic.

It's a question of horses for courses.

But never bet on anything in politics. The laws of common sense so rarely apply there.

Dear friend,

I suppose I’d better try and explain the intriguing front cover of the April 2008 magazine.

It all started when I bought a book that I had been meaning to read for ages — it was The Black Swan: The impact of the highly improbable by Nassim Nicholas Taleb

You should get yourself a copy, it’s a unique concoction — a readable book on the philosophy of risk. It’s packed with ideas that are so ingenious that you wonder why you’d never thought of them yourself

Taleb writes like a street preacher, spitting out ideas with a wild fervour

Back in the European dark ages, people were sure all swans were white. If you suggested that such a thing as a black swan existed, they would tell you to take a hike. A couple of centuries later and Europeans travelled to Australasia — where they ‘discovered’ black swans. The point is black swans existed all along — it’s just beyond the realm of the human psyche to imagine there are things out there beyond our knowledge

Hence the cover. Now we know black swans exist, what’s the chance that there aren’t a few pink ones hiding somewhere? The trouble is, these ‘outliers’ can mess things up, especially when it comes to finance. We can guess what happens when you’ve modelled your company to take a maximum hit to capital of 20% from a 1-in-250 year even and it turns out that you take a 2000% blast. Oblivion is obviously what happens

When Taleb expands on black swan theory, things can get quite scary

The trouble with the outliers is that they tend to be as large as they are improbable and end up having disproportionate effects on the manageable world that we like to theorise about. A market rises steadily and then crashes 25% in a single day, blowing leveraged investors out of the water, or a long-dormant volcano suddenly blows its top without warning

In Taleb’s universe, all modelling and projection of the future is a fraud — the only thing that counts is evidence that you have built up and evaluated rigorously. He is what he calls an empirical sceptic. The trouble is that experience can also be misleading. Taleb uses the example of the farmed turkey’s life. Every day the nice farmer feeds and tends to the turkey, so in the turkey’s experience the farmer is a friend. Then suddenly on Christmas Eve, the poor turkey’s knowledge and understanding of the true nature of the farmer is dramatically changed! There are many other examples and thought experiments in the book

Taleb recounts a risk seminar he attended at a top casino in Las Vegas

The casino used high-tech surveillance and risk limitation strategies to make sure it was never taken to the cleaners by either card counters, high rollers or a mathematically improbable run of bad luck on the tables

When he asked what the largest losses to hit the company had been in the past five years, one was a situation where a manger had had a family member kidnapped and another involved a rogue clerk who inexplicably failed to file IRS returns. It was these ‘freak’ events that had caused the most damage and cost them undisclosed millions

As you can see, the real conundrum of the book from an underwriting point of view is that if exposure rating is a fraud and experience rating is also highly misleading, then maybe we should pack up and go home? Are we just successful underwriters because we are unaware of the true risks we run and are simply lucky? Well, sorry to report that according to Taleb, we almost certainly are! Chin up, chancers!