Over the summer, I assessed the odds of a post Covid market turn and introduced the Hot Pepper Scale assessment of hard markets as an alternative to the underwriting clock. Six months later, I thought it a good time to reassess where things stand.

While the market is still improving, the anticipated move up the heat scale never materialized and if anything got a little cooler. Why? Well, for starters, I laid out eight possible catalysts to spice up the market. None of those came to pass. Let’s do a brief review and then we’ll move on to other considerations. Recall, we left last summer at Cayenne on the chart.

The Scoville Scale, Redux

Large 2H Cat Losses

While we had a significant number of storms (extending well past the letter Z), the insured losses were mild.

Covid Coverage Mandate

I suggested if companies were forced to cover Covid going forward that this would be a material catalyst. Fortunately, for balance sheets, this didn’t happen. However, it does remove some Scoville units.

Rating Agency Actions

A surprise negative reaction from the rating agencies – either through increased downgrades or raising capital standards – would have raised the temperature, but, alas, everything remained stable.

Company Failure

An obvious catalyst would have been a significant company failure, but we have seen nothing even approaching that.

Broker Boycott

Another possible positive event would have been brokers moving business away from wounded carriers, but, just like the rating agencies, the large brokers continue to be supportive of the status quo.

Large Cyber Event

While we have had the SolarWinds event, that is more news headlines than insurance industry changing loss event.

Berkshire Retreat

Not only has Berkshire not retreated, if anything, they appear to be accelerating their growth.

Alien Invasion

This was the catch all for anything none of us could have envisioned. While 2020 was a crazy year, we had nothing happen that the industry was wholly unprepared for.

So that’s a big O-fer. Not only did the cycle not heat up, it may have even dropped down the scale!

A Reminder on Necessary Conditions

The other piece I wrote just prior to the introduction of the Hot Pepper Scale was a review of the general conditions that cause cycle turns. There are three main factors: large losses, withdrawal of capacity, and fear.

Normal Loss Year

While there was a lot of uncertainty about ultimate Covid losses, so far, they have come in less than expected. By the way, this is not surprising. In the early days of an industry event, supposed industry experts always overrestimate the loss.

This happens without fail. It is amazing to me how people who do this for a living and have seen all types of events always guess too high. 9/11 was going to be $150B. Katrina was going to be $80. Sandy was going to be $60.

The only losses the industry underestimates are quake. Quake always creeps to be more than expected and, to some extent, mid sized Florida hurricanes subject to fraud (e.g. Wilma & Irma).

Otherwise, the industry always overplays its hand to try to create the fear needed for pricing and then has to walk it back by January. Whether this is due to human nature or is an intentional pattern to try to jawbone the market, I’ll let the reader decide.

Anyway, cat losses this year, all in, were unexceptional. Swiss Re estimated $83B recently. While they highlight how this is up 40% yoy, they ignore that it is down from the $94B in 2018 and in-line with the ten year average of $81B.

Furthermore, AIR’s recent update of PMLs estimated the global AAL at $100B. So, this year was in line with the ten year average and below the AAL. That does not sound like a catalyst for better pricing.

Capacity Withdrawal

If this is a normal loss year, then, by definition, there has been no overall impairment of capital. Furthermore, aside from some trapped retro capital, nobody is leaving the market.

However, on the other hand, we have seen over $10B of new money raised to take advantage of a hardening market. By all reports, these new entrants (plus increased appetite from some incumbents) took the edge off the pricing momentum.

On top of that, typical share repurchase has been suppressed by Covid prudence which is at least another $10B of incremental capital relative to expectations.

Add it all up and industry capital has likely grown meaningfully above average on the year.

Lack of Fear

You don’t have fear without large losses and capacity withdrawal. That goes back to the original thesis on necessary and sufficient conditions.

A cynic (who me?) would suggest that Covid followed the same script as every other false market turn screenplay. I mean, sure, it was more creative than “another large hurricane” sequel, so I’ll give the screenwriter credit for creativity, but how many times do you have to see this movie to keep suspending belief and think it’s going to end differently???

With the benefit of hindsight, there was no need for new entrants, at least on the reinsurance side. We can have a debate about some of the tougher primary lines, but even there, the newcos will be following capacity that brokers will know need business. Their appetite will be used by brokers as a stick to keep the incumbents from pushing pricing too hard.

Fear? Nope, no sign of fear.

Verdict: Mild, Not Spicy

So, where do things stand post 1/1 renewals? If you’ve read this far, you likely know the outcome so I won’t rehash it. The simplest way to explain it is cat pricing is still down from TEN years ago (even after you add the gains for 2021)!

While lines like D&O and cyber are hardening, they also are in dire need of it. I don’t think anyone would suggest those lines are generating excessive profits.

We went 0 for 8 on catalysts. We went 0 for 3 on necessary and sufficient conditions. We have too much capital chasing too few programs. I can no longer rate this Cayenne. We’re moving down to Arbol and to the bottom end of its range, just above Manzano.


OK, prediction time. For those who forgot, yes, I had the Chiefs winning the Super Bowl over the Niners last year (insert back pat emoji) when most had left them for dead because the Ravens were trendy.

For those not familiar with my predictions, I try to pick something not obvious, so we’re not going with the Chiefs again, even if they’re the easy pick.

Let’s start with the NFC. I don’t have strong feelings about the NFC. I think Green Bay is beatable. I think the Saints are beatable. The Seahawks aren’t playing well. Tampa may be as good a bet as any. The problem is the market is on them as they are at 9-1 vs. the Saints at 8-1 and GB at 4-1. I’d take the Bucs since they’re a lower seed, but I don’t feel strongly about it.

The AFC is more interesting. The market thinks only the Chiefs (2-1) and Bills (6-1) have a chance. The Bills are for real, but the odds aren’t good. The Browns and Colts are written off at 50-1. That leaves three teams to consider.

The Steelers are 22-1 and, while they were my preseason pick, I have lost confidence in them. The Ravens are starting to play better and have shrunk to 10-1. This seems too optimistic. Lamar Jackson has been terrible in the playoffs and it’s hard to imagine him winning four straight against gimmick defenses.

That leaves one team. The team that made it to the AFC final last year. The team that plays Baltimore this weekend and beat them in the regular season. Yes, I think the Titans will beat the Ravens again.

The question is can they also beat the Chiefs and Bills? Well, guess what, they destroyed the Bills earlier in the season! The Chiefs will be tough, but it’s not out of the question.

Here’s the thing. You get paid 30-1 on the Titans! 30-1! For a team that almost made the Super Bowl last year! Why would I take the Ravens at 1/3 the price?

Now, am I confident the Titans will even get to the Super Bowl? No. However, am I confident that if they played the tournament 30 times, they would win more than once? Absolutely. If you’re looking to avoid chalk, the Titans are where the value is.

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