Archive for the ‘The Cycle’ Category



One of my favourite blogs is the Money Illusion written by Scott Sumner. He’s risen to some prominence in the blogosphere because he’s giving a coherent, convincing narrative and counter-factual narrative of the crisis. Great stuff and highly recommended.

Except that he wants to destroy insurance companies.

Basically it seems that his point is that we need to avoid a nominal decline in GDP, even when real GDP growth is negative. I’m not an economist, so I won’t get into the macro here, but suffice it to say that he presents a very convincing argument. Tyler Cowen says this is the “best free lunch I’ve seen in years”. Yikes.

My comment is that because inflation is a transfer of wealth from creditors to debtors, insurance companies, the backstop of the world, get screwed. Massively. See here [warning, boring insurance press alert].

What’s one to think of this?

Well, I can think of a few consequences:

1. Insurance premiums go up, especially for long tail lines of business

2. Maybe we’re finally going to find that hard market.

3. There’s going to be no refuge, because Scott wants everyone to inflate simultaneously.

4. Maybe bank-insurance mega-conglomeration is the optimal strategy. The banks go mental and nearly bring the system down while old fogey insurance companies, being the last outpost of solvent capital, lose their shirts in the ensuing inflation. If they merge, at least nobody goes down.


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Insurance is like a shell game (for publicly traded companies’ results, at least).  You take losses from one year (just under this cup; see them? now watch carefully), and presto, suddenly they reappear several years down the line, “redundant” and ready to cushion the fall from grace.

enter exhibit #1:

Now that graph is, typically for Carpo, horribly explained. One thing that could be going on is that the different bars are historical reserve movement. Either way, the point is that someone is getting 8 points benefit from old over-reserved losses.

Now it’s a race to see whether they have enough padding in there to outlast the crappy results!

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The Circle of Life


The insurance cycle is a phenomenon that will always fascinate me. I was at a dinner once with one of the F&G alumni that dominate the Reinsurance industry and listened to a broker casually lather him up for being a genius. I paraphrase his response:

“We don’t know what we’re doing any more than anyone else, said our hero, we just let the cycle do the underwriting for us.”

Staggering. All you need is to know when you’re at the bottom of the cycle and the patience to wait it out and, presto, you make bundles.

 Carpo‘s chatting about this stuff and put together a nice little graph, though, typically they don’t do a very good job of explaining it:


A few things jump out at me from this. First, there’s only one year where the industry as a whole was unprofitable. Remarkable job of avoiding systematic risk, I think. Yay for us.

Second, where the hell is Katrina? You’re telling me the biggest cat loss ever yielded a flat year? It’s amazing how little cats actually matter. Andrew’s in there, but GC have called it “not really a turn”. I can’t imagine the kind of monster cat we’d have to have to truly turn the market.

Third, no peak ever crossed 20%? Really? I would love to see this graph in quartiles or with some kind of variance measure. This just looks like a very well diversified portfolio to me.

Fourth, it looks like only bottom #2 was a true liability crisis (if you discount #3) and #1 and #4 include an asset crisis (stock market drop and, presumably, brutal bond yields/inflation). Maybe we’re not so hot at avoiding systematic risk.

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