And so, the hardening failed to pass–comment

This issue (our first birthday issue by the way—thanks for all the cards) is an extreme version of this because we feature heavily two big themes that dominated the European corporate risk scene at the turn of the year. These are the annual insurance and reinsurance renewals round and the World Economic Forum’s analysis of the big risks for the year ahead—two very different topics really that share the common link word of risk. The good news for everyone is that we decided to focus on these two big topics partly because there have been no big catastrophes in the Atlantic or Europe in recent months to shake up the market and grab the front page in the normal dramatic way. Most of our readers will of course have suffered at work and at home from the extremely cold weather that hit Europe in the lead up to Christmas and the insurers will suffer an escalation in so-called frequency claims. But so far, the wind has not blown particularly hard, the hail stayed in the clouds most of the time and the rivers of Europe have not swollen to the point that their banks could no longer cope. hideSo, in the absence of any significant catastrophic activity of note in the final quarter, corporate insurance buyers enjoyed another bountiful New Year renewal in key markets such as Germany and France. Capacity for decent risks remained as plentiful as ever and terms and conditions consequently remained as soft as they have been for years. This is obviously great news for CRE readers who are still struggling to cope with tight budgets. And there is little sign of a change currently for those buyers who are not locked into year-end renewals and have to wait a little longer to negotiate their next block of coverage. Make hay while the sun shines continues to be the message, as it was all year long in 2010. The big industrial insurers are not happy with this situation of course and have seen a full twelve months of careful scaremongering go to waste. The absence of dramatic catastrophes combined with fine quarterly results that were bolstered by half-decent investment numbers and continued reserve releases made it very difficult for the carriers to force a change in the market. The brokers are of course publicly celebrating the plight of the insurers as they play the customer’s champion. Behind closed doors, however, broker CEOs are banging heads together harder than ever in an effort to find ways of bolstering their flagging revenues without annoying their customers (the insurance managers not the insurers). This could lead to some fruity news this year as brokers and insurers may well recommence their perennial battle to protect their share of a static or relatively dwindling revenue cake. Remember FERMA in Geneva when the brokers defended the introduction of those much-loved service fees to bolster their flagging revenues then? Maybe we will see round two in Stockholm in October. Long-term analysts of the European and international insurance market will begin to warn over the coming months that something has to give soon. If it does not, then combined ratios will inevitably start to exceed 100% just as the reserves pot runs dry, and insurance group CEOs may start to really turn up the pressure on their corporate insurance arms. Past cycles would suggest that this has to happen in the second half of this year at the latest. Surely industrial insurance buyers may have to expect the start of a hardening in the second half of this year as the insurers prepare for a serious stab at it for the year-end. If so, it could lead to quite an eventful debate at the FERMA conference. The fast-approaching Solvency II and new accounting standards can only serve to raise the cost of capital for the insurers and therefore hasten the hardening, the logic would suggest. Expect an increasingly frantic rash of scare stories from the insurer camp as the year progresses and our beloved new Directive nears the statute books (what will we talk about when it’s finished—Solvency III?). And what about the WEF conclusions? Surely even if the insurers can’t get away with using Solvency II and perhaps also the new accounting standards (see pages 20 and 21) as good excuses to raise prices that big scary macro world out there should surely do the trick? According to the WEF boffins we are teetering on the edge of another collapse because the world is simply currently in no fit state to cope with any new and major shocks. This is because the amplified frequency and severity of risks to global stability have apparently not yet been met with significant progress in global governance systems. Meanwhile the financial crisis has drained the world’s capacity to deal with future threats. That leaves us all in a very precarious position. There was a healthy level of disagreement among the 580 expert respondents to the WEF report’s survey on the key risks that currently face the global economy. But that is probably because they are all equally scary. The five key risks picked out were cyber-security, demographic challenges, resource security, retrenchment from globalisation and weapons of mass destruction. At the risk of being lambasted by insurers and brokers wherever I dare to tread in Europe over the next few months, however, I would dare to suggest that none of these nasty and very serious big risks actually represent a significant threat to the price and availability of coverage to corporate insurance buyers. The rot was supposed to stop for the insurers at this year-end renewal and it simply failed to happen. All the factors noted above such as steadily rising combined ratios, dwindling reserves pots, perilous investment returns and a background of extreme global financial, economic, political and social instability were all there and it failed to come to pass. I would not be hugely surprised if at this point next year the worst that we had to report was a mild correction for most as the insurers sought to ‘re-underwrite’ and ‘clean up’ their books and buyers were forced to try out some new capacity.

And so, the hardening failed to pass–comment

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