Capital levels in the property/casualty insurance sector can be ambiguous. As in other industries, capital can be fungible or trapped, liquid or illiquid, affected by prevailing asset values, collateralized or rated. But insurance and reinsurance are more complicated still. Underwriters’ published capital levels are additionally affected by the estimates of actuaries who must attempt to project liabilities one, five, 10, even 30 years into the future. This creates a situation in which sector participants tacitly acknowledge that “book value” or accounting capital is actually an educated guess.

With hindsight, there have been obvious periods of very poor guessing indeed. The most recent was the so-called liability crisis during which the industry’s collective estimates were far too sanguine for at least four years from 1998 to 2002. Carriers didn’t understand just how bad things were until 2004—and by then it was too late. All of this happened just in time for Hurricanes Charlie, Ivan, Jeanne, Katrina, Rita and Wilma to arrive, damaging the sector’s confidence in its own ability to forecast long-tail liabilities as well as short-tail catastrophes. How could things have gone wrong so quickly? As recently as the late 1990s the sector had felt flush with capital with booming equity markets, manageable catastrophes and willing investors.