You will doubtless have seen the amazing but terrifying picture of a throng of climbers lining up patiently to make their ascent of the peak of Mount Everest doing the rounds of social media over the past few weeks.
The shot shows how far we have come since the days of Sherpa Tenzing and Edmund Hillary, and is testament to the way advances in technology and sophistication are transforming what was once unique into the commonplace.
Don’t misunderstand me – for all the tech and toys available today, scaling Everest is still an extremely dangerous undertaking.
The 2019 mountaineers may look like they are queuing up to use an ATM on a Saturday night out but they are all still risking their lives. Paradoxically, our advancements simply mean that more and more people are able to put themselves in extreme danger.
I was reminded of this image as I read about Greenlight Re joining hedge fund peer Third Point Re on the unfavourable AM Best ratings perch of A- with a negative outlook.
At the turn of the millennium the idea of a hedge fund reinsurer was radical, pioneering and a little scary. Then, over time, they became relatively commonplace. And, like extreme mountaineering, while we know the model is definitely not impossible to operate, it is difficult to execute and can be perilous.
Now we find a couple of the hedge fund brethren on a dangerous traverse, standing perilously close to the edge.
Like the contemporary Himalayan alpinists hoping not to slip, this is not a comfortable place to be waiting – the drop would almost certainly be fatal.
A- is still generally the lowest acceptable rating for a reinsurer looking to do US business.
And although fronting arrangements might cushion the fall if they were forced over the edge, such extreme remedies would make the difficult task of turning a net underwriting profit well-nigh impossible and only compound their fundamental problem.
Of course, it needn’t happen – AM Best defines an outlook as an indication of the potential future direction of its credit rating over an intermediate period, generally 36 months.
A year or more of improved results and the pair may return to projecting a picture of stability.
But while we should never shoot the messenger, AM Best’s subtle change of tone doesn’t do either reinsurer any favours. The purchase of reinsurance is an expression of the buyer’s confidence in the quality of the seller’s paper. It is forward-looking in nature.
As such, paper from a provider whose next ratings move is likely to be downward has to be worth less than support from a reinsurer whose paper is more likely to be upgraded over the same period.
While neither these reinsurers’ ability or willingness to pay is in doubt, AM Best’s negative move merely reflects the underlying reality that neither has performed well over many years.
The simple fact is that people prefer to do business with counterparties that make money more often than not.
If the pair had an anti-selection problem before, AM Best’s interventions will only have made it harder to attract the best business.
They are in a cold and lonely place – the air is thin and the margin for error is now thinner still.