Why hard markets are a relic of the past

I am often asked: will we ever see a return to a truly hard global cat reinsurance market?

I believe the answer is that it is extremely unlikely. Why would I say this? You have to go back in time to the series of losses in the early 1990s and how they completely transformed the market.

The retrocession, or London Market excess of loss (LMX) spiral, was a market phenomenon that developed during the 1970s and 1980s. It was built upon reinsurers reinsuring the same risks among themselves and was especially centred in the London Market.

In those days keeping aggregate accumulations was not de rigueur and nobody used cat models. It was a Ponzi scheme that created a false capacity and was bound to collapse, and it did just that.

The hardest market I have ever experienced was post Hurricane Andrew, a category 5 Atlantic hurricane, that struck the Bahamas, Florida, and Louisiana in mid-to-late August 1992. This storm caused an estimated $17 billion in total insured losses—not so much in comparison to today.

This loss followed hot on the heels of the 1990 (A,D,G) European storms, and 1991 Typhoon Mireille in Japan, and was rapidly followed by the 1994 Northridge Earthquake in California.

It collapsed the LMX spiral and we entered a new paradigm. Eight new Bermuda-based specialist catastrophe reinsurers, backed by the cap0ital markets, set up shop to take advantage of the void in property catastrophe capacity.

RenaissanceRe, PartnerRe, IPC Re, Tempest Re, Mid-Ocean, Global Capital Re, Cat Limited and LaSalle Re were the class of 1992/93. The capacity they injected was still not enough to fully satisfy demand, resulting in panic-buying by clients desperate to complete their programmes, and rate increases of 100 to 500 percent.

Supply and demand