News

Opportunity knocks

sign large The Classes of 2001 and 2006 were both born of unprecedented disasters, and both hoped to share in the prosperity that came from seeing the hardest market for a generation. But while they may have set off from the same point, it is interesting to look at how and why their paths have diverged.

Following 9/11, a wide range of opportunities existed for those with the courage and the capital to make the most of the subsequent rate rises. A market that had been gently rising for some 18 months went into overdrive, with the broadest spectrum of classes of insurance and reinsurance being affected.

The speed with which the insurance industry responded was impressive. Within days, business plans were drafted; within weeks they were agreed and cash and ratings were in place. By December 2001, they were ready to go.

‘Freedom’ was the watchword

Though not all of the companies shared the same risk appetites, the market offered something for everyone – and not a single risk renewed at its previous price. Freedom was their watchword. Freedom of choice in the classes of business they wrote, freedom in choice of personnel, and freedom in how they operated. By January 2005, the most widely debated question was how they would return surplus to their shareholders.

While the devastation that Hurricane Katrina wrought in New Orleans was nearly as shocking as the man-made catastrophe of 9/11, the fact that it was one of a series of storms also raised a new set of questions about frequency as well as size.

The rules of engagement changed between 2001 and 2006. The unbounded freedom that characterised the Class of 2001’s approach was to become severely restricted

Undoubtedly spurred on by the success of the Class of 2001, a new round of capital raising gave birth to the Class of 2006. But the rules of engagement had changed and the unbounded freedom that characterised the Class of 2001’s approach was to become severely restricted.

Restrictions were inevitable

The first restriction came in the move from man to model. Underwriting experience had long been the safety valve for the reinsurance industry, with the vast majority of companies benefiting from the expertise and commonsense of their management. The ‘new’ capital, however, preferred the comfort of tangible data that could also be presented to investors.

The second was in the power of the ratings agencies and their focus on risk-based capital. With increasingly heavy capital requirements for mono-line businesses the newcomers could see all the business they wanted. But their cash could only support a limited amount of exposure, leading some experienced market leaders to suggest that a cat-only operation was no longer viable.

While their roots may lie in the same ground, their development has been the result of the very different market conditions

The third was the entry into the market of ‘sidecars’: short term, transitory players that take the edge off rate increases for entities that have to take a longer vision. When senior figures in the market called for an end to market ‘cycles’ this was unlikely to have been what they had in mind.

So, while their roots may lie in the same ground, the development of each class has been the result of the very different market conditions in which they have grown up. While the Class of 2001 had a wider scope than its successors, it is likely that the Class of 2006 will have to seek a broader mix of businesses or a short-term strategy followed by a timely exit as the last few months have illustrated.

Guy Baly