What will be the tenor of the Baden Baden meeting this year?
This is usually the time when the renewals season really swings into action. Generally, the meet and greet of the Rendez-Vous de Septembre converts to serious discussions of programme details in the hotels and restaurants of Baden Baden. Whether this will be the case in 2001 remains to be seen.
At the beginning of the Rendez-Vous, reinsurers were predicting a late renewals season - not necessarily an unknown event, bearing in mind that the season has tended to stretch later and later in previous years. And they were also talking bullishly about substantial rate increases.
Speaking at a breakfast briefing, Henry Keeling, CEO of XL Re, noted price acceleration in the four months to September, adding that re/insurers' results were showing “chronic underpricing”. With reinsurers increasingly looking at opportunities in the overlapping areas between their business and the capital markets, he predicted a move towards a smaller number of larger players within the reinsurance sector. Small to medium size reinsurers will feel the need to merge, particularly with the simultaneous consolidation in the supply chain. Despite the efforts of governments and regulators in various parts of the world to try to resist deregulation and the opening up of their local markets, re/insurers continue to try to globalise their business, he said, employing the term ‘glocalisation' to describe XL Re's attitude to its business; ‘think global, act local'.
Despite his concerns that certain players in the reinsurance sector have a shaky future, he was confident that conditions were getting better. “We are in a harder market and it will continue to harden,” he said.
Mr Keeling's predictions were echoed by Patrick Cerceau of AXA Corporate Solutions. He foresaw a 20% increase in premiums across the board for the current renewals season, although he admitted it was “not enough”. Over the past five to seven years, risk managers had seen rate reductions, he said, though recently there had been “dramatic increases” in property business in France, for example. Patrick Thiele of Partner Re noted that prices were rising in property catastrophe business, and there were signs of the same trend in liability business. In particular, European cat business was showing increased rates in response to fairly recent disasters.
Although there was still capacity in the market because there was a good level of surplus in the industry, Mr Cerceau felt that reinsurers were beginning to react to the generally harsh environment and were underwriting on a more technical basis.
AXA had decided to let certain accounts go at the last renewals season, said Mr Cerceau, but it remained one of the few players in the retrocession market, with about $1bn capacity worldwide.
Price increases in the traditional reinsurance sector could, however, lead to buyers seeking alternative solutions such as capital markets products for at least part of their risk transfer requirements. Some of the reinsurance delegates at the Rendez-Vous felt that the alternative risk transfer arena had been somewhat hyped up in recent years, but did concede there were applications for re/insurance techniques in other parts of the capital markets. Whether those markets would then take the reinsurance sector's client base remained an unanswered question.
Overall, at the beginning of the Rendez-Vous, reinsurers were pretty confident the desperately needed market correction was on the cards and that the industry was facing a pretty secure future, notwithstanding the rising asbestos exposures which potentially could erode surpluses. These sentiments also fitted in with predictions within the investment banking community that primary insurers would become more uncertain about their future in the light of the predicted economic downturn.
This would lead to insurers looking more to reinsurers to provide them with certainty, resulting in a higher demand for reinsurance while capacity would not be increasing at the same rate. Inevitably, this would mean higher rates across the board, and a flight to quality as insurers would want to ensure that their security was unshakeable.
By the morning of 12 September, this sentiment had changed. In the immediate aftermath of the attacks in the US, reinsurers were visibly shaken. Some were predicting the death of the industry - every major reinsurer's solvency would be blown, it was suggested, and western economies would be left in ruins.
Although a few of the smaller players in the industry currently are looking somewhat unsteady, so far the reinsurance sector seems confident the US attacks will not prove a mortal body blow. Should another major catastrophe strike this year, however, things may be very different; the end of the Atlantic hurricane season is being awaited with bated breath.
Headline estimated losses have been issued by most of the major players in the sector, but how accurate they are remains to be seen. Brokers are reporting having a difficult time, as concerned clients are pushing for quotes but few are forthcoming. Those that are being issued are showing severe rises in premium levels and much stricter terms. Aviation renewals were pushed up to the line at the beginning of October, and it is likely that underwriters will be doing the same with the 1/1 renewals. One reinsurer said it would not even consider issuing any quotes until the end of October, and suggested many others would be employing the same technique, waiting for as long as possible before confirming in order not to lose out on any rate increases later in the season. As a result, clients are getting frustrated, not to mention concerned that they may find themselves without cover at a time when psychologically it is particularly important. Brokers are being squeezed on both sides, and reinsurers are controlling the game but more because they are unwilling to make the next move.
So what will be the topics of discussion in Baden Baden? Certainly, the level of claims emanating from the 11 September catastrophe. Surely, the terrorism exclusions on property covers and sources of alternative risk capital for the exposures. Definitely, how high the rates may rise in the light of such poor market conditions and such immense losses. And it is guaranteed that speculation will abound over who will be the first reinsurer to collapse after all that has happened.