Hurricanes Katrina and Rita - Heralding The Next Hard Market?

October 2005

Whenever the insurance market suffers a major loss there almost immediately follows a chorus of rhetoric proclaiming the start of the next hard market. And so it is with this year's US Gulf hurricanes.

But is this a lot of noise being made by those who would talk-up the market, or does it reflect a genuine trend?

There is a common misconception that insurance rates are predicated solely on the likelihood of loss. In fact, insurance rates directly reflect the volume of investment capital coming into the industry and the competition that generates for the premium dollar.

Claims rarely have a direct impact on rates unless they are of such a magnitude they drive insurers out of the market or any given sector of the market.

Executive Director Philip Bilney adds, "In reality, rates only rise when people like us - brokers looking for the best deals for our clients - run out of options. When the competition for risk dries up, then the market hardens. Insurance capacity is a commodity and like any other commodity if demand outstrips supply, the price goes up. It's as simple as that."

So were Katrina and Rita big enough to move the market? Frankly, we don't know yet.

At first, we doubted they were, but the losses now stacking up in the Energy Market are starting to suggest otherwise.

The Hull market is definitely hardening, with increased rates being charged in London.

The trend is a little more difficult to discern on the Cargo side. There is a great deal of talk about the Professional Re's imposing tough terms on the 1 January treaty renewals, although Reinsurers are yet to put pen to paper.

It looks increasingly likely the soft pricing of the last 12 months may indeed have come to an end.