As evidenced by the chart on the right there is a serious imbalance. Using US policyholder surplus as supply and US GDP as demand for insurance, the ratio of supply:demand is represented by the red line currently at 3.7%.
Note that the median in recent decades is 3.2% meaning we are at high levels and that there is a fierce downward pressure on pricing.
When does it change? What's the tipping point? Could the new litigation beyond subprime bring about this change?
I heard an interesting take today from a senior reinsurance broker in London who says the tipping point has always been the first major reinsurance firm that refuses to write anything further and that this has a ripple effect, starting with the primary insurance underwriters that rely on this reinsurance.
This broker sees a period of time beginning in the next 6 months where capacity is scarce and serious profits can be made from escalating prices, despite the fact that as the crisis widens and deepens, Advisen's $3.6b estimate for D&O losses is likely to increase.
He sees Q2 2008 reports leading to painful discussions about reserves among underwriting firm managers and that this will lead to somebody being that first firm to close up the Financial Institution D&O shop.
In the meantime he's placing a ton of excess layers for those wanting to take advantage of capacity while it's still available.
As the turmoil in financial institutions continues to play out wickedly in front of our eyes, the insurance industry awaits the inevitable claims. The question is whether the inevitable contraction of capacity and increase in pricing will be isolated to financial institution D&O or even to D&O or whether the impact of these claims can have a material impact on overall insurance pricing.