News analysis: Hurricane Katrina - Why should Katrina be a market-turning event?

(From Reinsurance)

The week before Monte Carlo, at the presentation of Fitch Ratings' annual outlook for the global reinsurance industry in 2005, the guest of honour was Rolf Tolle, franchise performance director at Lloyd's. Rolf unleashed a couple of slides that debunk the most popular myths about how the reinsurance cycle works.

The chart in question showed the US property and casualty-loss ratio going back to 1967, and showed an almost-perfect sine wave - each peak was followed by a descent into a trough, which was followed by an ascent toward the next peak. Rolf commented that the date would show that this pattern could be repeated all the way back to 1920, but he hadn't been able to fit such a long series of data onto a slide.

Most of us tend to blame hard markets on events. We find it more rational to find a simple cause-and-effect explanation. In this way, the early 1990s hard market is consistently blamed on Hurricane Andrew, and responsibility for the premium hikes from 2001 onwards is laid firmly at the door of the terrorist attacks of September 11th.

But Rolf's slide shows that this analysis simply doesn't stack up - if the market really was driven by catastrophic events, the chart would have evinced massive random spikes as each hurricane, typhoon or earthquake made its mark. The harsh fact is the market was hardening before Andrew blasted into Florida and Louisiana, and that the same was happening before al-Qaeda decided to declare open season on Western civilians.

After all, Hurricane Hugo (the biggest windstorm loss of its day, pre-Andrew) did nothing to prevent the worst excesses of the soft market of the late 1980s, and the Northridge and Kobe earthquakes did extraordinarily little to stop the rapid deterioration in pricing, terms and conditions that occurred from 1995 onwards.

So, will underwriters get the new hard market that they crave this time?