The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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Dear friend,

So it's all over is it?

Has the slow-motion economic car crash that started in 2007 and culminated in the humbling of Wall Street and the AIG bail-out last autumn finally been cleared from the highway? Has it really?

Like an old drunk who has seen the light, should we believe the global economy has sobered up, taken three paracetamol and set off on a spritely morning jog?
I'm not buying it.

Who exactly do we think we are kidding? So GDP has gone up for a quarter in France, Germany and Japan - big deal. A few hundred thousand public sector employees have been cashing in their clunkers worldwide, subsidised by their highly indebted governments.

But what happens tomorrow? By then all the optimistic people with any spare cash will have already bought new cars - they can't buy another next year, can they? And governments may be encouraged enough by the phoney GDP increase to start weaning the carmakers off their subsidies.

But GDP will soon start to go down again and finally the world will begin the much-delayed, painful process of bringing global capacity down to match the new reduced levels of demand.

Similarly, we know that the vast fiscal and monetary experiment embarked upon by global governments will eventually come to an end, as the credibility of the paper money system is stretched to breaking point by the mumbo jumbo of 'quantitative easing'.

No sir, I suspect we haven't even started yet.

"GDP will soon start to go down again and the world will begin the painful process of bringing global capacity down"

What got us into this mess was a mega credit expansion that started somewhere in the early eighties, blowing up asset bubble after asset bubble along its way.

It's funny that through 30 years of relative boom, spending rose and GDP dutifully went up - people felt richer - they even felt smarter. And to look at them they were richer and smarter - they had nicer cars and new dishwashers in their kitchens, but in fact real wages were generally stagnating.

They were borrowing and re-borrowing against their inflated assets to consume; eventually the whole circus became unsustainable and such borrowing shifted quickly to saving for a rainy day.

In the end throes of the credit crisis a final act of desperation is played out - governments step in first as the borrower and then the consumer of last resort in an unsustainable orgy of consumption and wealth destruction.

Eventually this too comes to an end when the gods of debt default, revolution and hyperinflation intervene suddenly, and then it's finally time for the great wave of credit contraction to begin.

Debt is either inflated away, defaulted or written off, supply is eventually scaled down and we can finally get back to the business of growing again, but this time based on the investment of savings and not reckless borrowing.

The trouble is these credit contractions take ages - the last one was only finally seen off by the vast stimulus of World War II.

It's depressing - but it's not the end of the world. Relative economic stagnation has had a bad rap - just look at the Japanese. And when it is finally all over, real wealth will be able to increase and so will consumption - and this time it could be sustainable.
Just don't hold your breath, or believe that this rally in stocks will last, or that all government-backed debt is going to be repaid.

And while we're on the way down, let's not panic - insurance spend won't disappear. We still sell an essential product, but demand will probably stay muted for a decade.

You can't fight the markets - so what are (re)insurance CEOs to do? Actually, it's more about what not to do.

Watch out for overexposure to any one financial asset; don't rely on governments to honour their debts; don't get suckered into a market "rebound"; steer clear of real estate; run your business as if you won't be able to raise capital; don't drop your underwriting guard just because demand is falling, and, of course, never be tempted to over egg your aggs.

Stick to these rules or the next clunker heading for the crusher may be you.

Mark Geoghegan, Editor