Retro is proving a rock within the reinsurance sector, delegates to Benfield's biennial European seminar were told. Sarah Goddard reports.

The last time delegates gathered in Paris for Benfield's European seminar, a main topic of debate was whether the reinsurance industry was overcapitalised. Two years later and this was the last thing on their minds. Instead, issues such as reinsurance recoverables, the capacity crunch in certain liability classes and investor power in the current climate were the source of debate.

Retro was the first issue to be formally tackled at the gathering of more than 250 delegates. Under the title, 'Retro market: I am a rock', Benfield's Dominic Christian, leader of the company's worldwide retro team, contended that the retro market had, since the last meeting, offered a high degree of stability. This was notwithstanding his comment in 2001 that the detailed information he gave then could come back to haunt him (see Global Reinsurance, July/August 2001).

In 2003, there are about 80 buyers and about 40 active markets in the retro arena, he said, adding it is "a vital element in the overall reinsurance atmosphere." Over the past three years, claims hitting the retro market have been less than $3bn. This compares to $2.5bn paid in claims in the 20 months up to May 2001, of which about $1bn related to 1999's European windstorm Lothar.

Protective partnerships
The essence of retro is partnership, said Mr Christian, with players seriously prepared to offer longer-term protection. "I contend that the retro market over the past two years has offered a high degree of stability," he said. At the same time, the capital markets sector has been increasingly involved, with 2002 recording a bumper year in terms of cat bond issuance, including the Swiss Re Pioneer Bond, the first cat bond shelf offering.

But what is it that continues to attract buyers to the retro market? Answering his own question, Mr Christian pointed to portfolio sustainability, and despite the shrinking number of buyers in the market, due to Lloyd's syndicate amalgamations and a growing tendency towards centralised retro buying in reinsurance companies, 'Planet Retro' remains strong in capacity terms. Organisations such as Brit, Aspen, Odyssey US and XL are growing their commitment to retro business, he said, resulting in about $9.4bn capacity now available in the retro market. Two year ago, when Benfield estimated that combined premium of $1.38bn had purchased total retro cover of $8.47bn, he had reckoned that "demand, we suspect, is at an all time high."

Lloyd's underwriter Peter Grove, of Limit Underwriting Ltd, had also appeared on the same stage two years before, when he had noted the marked reduction in retro players over the previous few years. This had raised the issue of continuity of retrocessionaires in general; from 400 markets in 1985, numbers had dropped to 235 in 1991, and by 2001 just ten survived, he had pointed out. This theme of stability among market players underscored the two days of this year's meeting, with several speakers pointing to the demise of Gerling - the world's sixth largest reinsurer this time last year - as evidence that no company is too important in its sector to fail. As Benfield's Christopher Klein pointed out in a presentation on systemic risk in the re/insurance industry, "is there an element of denial that a company is too big and prestigious to fail? Well, Gerling was the sixth largest company to go down and in the UK, it is interesting to see how many former giants, such as Marconi and Cable & Wireless are now emaciated members of the 90% club."

Returning to the retro theme, Mr Groves noted that he had expected to see the influence of retro writers to have changed over the past decade. Back in the late 1980s and early 1990s, retro writers had "a huge influence," he said, but when the LMX spiral collapsed, he then believed that retrocessionaires' influence would change. "But it hasn't," he said. And now the "evil reinsurer" putting up premium rates and tightening terms and conditions is an excuse given by primary writers and their reinsurers to clients when justifying rate increases and changes in terms and conditions. Nevertheless, the retro business has changed in some ways over the past ten years, in particular from the point of view of the principals in the business, said Mr Grove. He explained that nowadays, "everything is done by committee, by a faceless group of people," and that no longer is the business conducted by individuals involved in making the purchasing decisions. "It is not a case of having a relationship any more with the individual underwriters and buyer of the ceding company," he said. "This concerns me for the future" because in the past the business has been successful as a result of both being well run and because of the relationships between individuals. Despite the persisting theme of reinsurance recoverables and reinsurers' willingness as well as ability to pay, Mr Grove was certain the retro market would pay its claims, "but whether it will survive in the same way, I'm not sure."

Jonathan Isherwood, Chairman and CEO of the property division (facultative and treaty) at GE Frankona, felt that today's retro market is characterised by better security and "more meaningful relationships. Retro is very much part of a long-term strategy, not an opportunistic play," he said.

In response to a question on the impact of the increased use of modeling in the retro business, Gerald Radke, the soon to be retiring CEO of PXRE Group Ltd, predicted that modeling will become increasingly important in retro business. "A major reason is that transparency is a major issue with the capital markets," he contended. "We need to show the capital markets that we are able to identify, measure and control risks," and one of the tools which will help achieve this is modelling. He did concede that the use of models "can dampen the upside," but pointed out that this should be counterbalanced by a reduced price reduction in the downcycle.

Aiding reliability
From the buyer's perspective, using models helps with reliability said Manfred Seitz, head of ART including Munich American capital markets at Munich Re. "The provision of data is a very critical point," he said, and one which is of great importance to the capital markets.

But the opposing argument is that the consistent use of models results in standardised pricing. Peter Grove expressed his concern that risk carriers are "coming up with exactly the same price." Modeling, he said, is "a piece of the puzzle... other factors should be taken into account." In addition, he pointed out that it was possible for a client to give the retro writer information that had already been modeled, and that once the client had the cover, they could "start writing loads of business which isn't in the models." Again, the issue of relationships entered the frame, and Mr Radke commented that a good relationship "goes a long way towards dealing with these sorts of issues." Retro should not be a cover lending a green light for the client to "write as much as they want and then claim for a loss," he said. He pointed out that the increased use of modeling has led to retro writers taking longer and longer to issue quotations.

When asked what they saw as the most important single factor for the retro buyer, the panel was split in its answers. According to Mr Isherwood, it was "people, relationships, security and strength," and that there is not one single most important factor. Limit's Mr Grove felt that the most important aspect was that the reinsurer understood the business, while Munich Re's Mr Seitz felt that security was the most important aspect. The clients need "sustainable capacity over three to five years," he contended.

Whether Mr Grove's "evil reinsurers" can match other client needs was another matter. When challenged on the availability of terrorism cover in the retro market, the panel took opposing views. PXRE had taken the position that it didn't want to cover terrorism, though it was getting involved in some in the aviation business, explained Mr Radke. Munich Re's Mr Seitz said that his organisation did have some terrorism exposures, but saw no need to buy cover. "I wouldn't spend a cent on it," he said. Mr Grove "would like to see the entire market give cover," adding that the marine market had offered war cover for many years. He did, however, point out the muddy area of whether non-TRIA - US domestic - terrorism is currently covered. Benfield's Mr Isherwood took a more pragmatic approach to the question, noting that there are many parts of the world where terrorism cover is not required. Where it is to be written, it needs to be fully priced, he said, and perhaps "argued out of retro covers."

And what could change retro in the future? asked a delegate. For Mr Radke, it was the prospect of "general influx of capital", which would bring prices down. "At the moment, it looks like the market has been behaving responsibly," he noted. For Mr Grove, it was the confidence in the reinsurance market paying its losses, noting that this was down to the willingness to pay as well as the ability to do so. "There is a fear factor that some insurance companies will have going forward simply dealing with reinsurers," he predicted. If the numbers of disputes increase, more clients will "question the sense of reinsurers," he said, though noting that "the small companies around the world desperately need their reinsurers." For Mr Seitz, more consolidation will reduce the need for retro. "Larger companies buy less retro," he said, and have access to different types of capital, through the capital markets.

By Sarah Goddard

Sarah Goddard is the editor of Global Reinsurance.