If you think reinsurance brokers have it tough…

Remember the Cabbage Patch doll?

They are a brief and bizarre footnote in the history of commerce, but I do have a vague memory of Cabbage Patch Riots making the UK news in the build-up to the Christmas season of 1983.

Desperate parents fought pitched battles over a very limited supply of that season’s must-have toy.

It’s bizarre that an ugly, inanimate doll could cause so much angst.

For a younger audience, equivalent events in subsequent years would include the Tickle Me Elmo mania of 1996, the Furby craze of 1998 and Hatchimals in 2016.

The scenario was immortalised by Arnold Schwarzenegger in the 1996 Christmas movie Jingle all the way in which our action hero battled lustily for the last Turbo Man toy.

I expect most reinsurance brokers will feel a strong affinity with Austria’s most famous export as they fight tooth and nail for every last drop of Floridian cat capacity this season.

But we in reinsurance have it easy.

Christmas and toy shortages go together like turkey and cranberry sauce.

This is because of the structure of the market.

If you combine a set deadline, a huge production lead-in time, a global supply chain and extremely difficult-to-gauge levels of demand you are asking for trouble.

The first problem is that toy demand is incredibly fickle – no-one really knows how it works. Playground propaganda and the network effect is impossible to predict.

One year’s Stretch Armstrong or Buzz Lightyear is another’s complete dud.

The consequences of over-ordering something that turns out to be a damp squib can be fatal for retailers. No-one wants to bet the farm on a fad that may or may not ignite.

When the Star Wars Franchise was re-booted in 1999, publisher Dorling Kindersley famously got torpedoed by massively overestimating demand for Star Wars-related books.

This means that everyone’s always slightly short, even at the best of times.

Also, these products are discretionary purchases.

Almost everyone can buy one without it breaking the bank and so demand can be almost unlimited if everyone gets the same idea simultaneously.

Big retailers will have placed their orders shortly after Easter and the Christmas production is in train over the summer. The global outsourcing of manufacturing means the supply chain is very long.

So by the time you find out what’s hot, it’s too late to ramp up production in time for the deadline.

The factories are probably all re-tooled and making Easter bunnies by that stage!

Is it any wonder that the toy market fails so regularly?

We’re lucky in reinsurance. Yes, we have deadlines, but our demand is so much more predictable.

There is no form of reinsurance that is fashionable one year and out of favour the next. Capital support is always in vogue. Reinsurance is not discretionary, it’s essential.

Searching for a seasonal analogy, I’d say reinsurers are a little more like turkey farmers.

They can predict very closely how many birds they are going to need to have on the supermarket shelves and already know at what date maximum demand is going to occur.

The trouble with our form of turkey farming is that a combination of growth and consolidation among the big supermarkets has given them too much market power and producers have been squeezed for decades.

The farmers have been giving up and turning to other lines.

So after years of disappointment, not enough turkeys are being produced to meet demand and scarcity value has entered the equation.

Big buyers have had to start paying decent prices if they want to avoid being caught short.

If you are lucky enough to find quality staff unencumbered by restrictive covenants and have a progressive regulator, ratings agency and pedigree investors on your side, a reinsurance business can be up and running in about the same 4-6 month period it takes a turkey to grow to maturity.

But this year we already know that no new supply is coming on track. It’s far too late.

When faced with the ultimate sanction, at least turkey consumers can substitute another product for the main meal.

It won’t feel quite right, and the in-laws might tut-tut, but when push comes to shove any other roast meat will do the job of feeding a family gathering.

In contrast reinsurance buyers only have debt or equity to take its place at the table – and neither are anywhere near as efficient, nor taste remotely the same.

The ultimate remedy to reinsurance buyers unable to raise equity or debt to replace reinsurance is simply to insure less stuff – and that really is hard to swallow.

So, if you are a reinsurance buyer or broker facing shortfalls for the first time in a generation, you have all of our sympathies.

But please console yourself that it could be worse – you should thank your lucky stars that you’re not a toy buyer stuck in the middle of the latest craze!

Have a great festive season. See you in 2023,

Mark Geoghegan,

Editor, The Voice of Insurance.

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The November Podcasts

Here’s what you missed last month:

Ep145 Adrian Jones Partner HSCM Ventures: We need to reconsider the word Insurtech

Ep144 Talbir Bains Group CEO Volante Global: I’d rather lose doing the right thing than win doing the wrong thing

Ep143 Chris Cheatham Bold Penguin: Build out now because digital’s definitely working

Ep142 Luke Tanzer CEO RiverStone International: Freeing live underwriters to work the hardening market