Despite a number of challenges currently facing reinsurers, Nigel Allen looks at why the sector has been placed on a stable footing

Some 2,600 industry practitioners descended upon Monte Carlo for the 47th Rendez-Vous de Septembre. Unsurprisingly, as with 2003, one was hard pushed to find anyone on the first day discussing anything other than hurricane activity, recent downgrades, and the potential stable outlook for the reinsurance sector. This year Ivan replaced Fabian, Converium replaced Munich Re and stable replaced negative. But these were not the only changes which marked this year's Rendez-Vous out from previous years.

"This year is a little different," said Patrick Thiele, president and CEO of Partner Re Ltd. "In the last two or three years, there has been a clear sense that the reinsurers had a little more clout, a little more sway, than the insurers." However, this year Mr Thiele said that he believed a greater sense of balance had been achieved between the interests of the two parties, "our interests in making sure that we are being paid the appropriate amount for the risk, and their interests in getting the best price for their risk assumption and making sure that the security which they so deeply need is being met by the reinsurance company."

Market conditions

There were few attendees at the Rendez-Vous who would argue that the market has shown pockets of softening particularly in the last twelve months, with most citing property rates on the catastrophe side as being most affected. However, many believed that the recent upturn in hurricane activity could stem such declines and could result in property cat rates beginning to climb once again. "There has certainly been a softening in property rates over the last year, particularly in 'cat' because we have had a fairly benign loss activity in recent years," explained, Bob Cooney, Chairman, president and CEO of Max Re Ltd. "But I think that (Ivan) is going to be a sobering event. So I think that rates will certainly settle out and will probably start going up, particularly for windstorm exposures, given the activity over the last four weeks."

Rick Pagnani, president & CEO, Reinsurance, Quanta Reinsurance, added: "As far as we are concerned, we think that on the casualty side we should see a flat environment at 1/1. We are cautious relative to the 7/1 renewals and particularly on the professional liability side. On the property side, certainly the current hurricane activity should stay further rate declines on the cat market, but that will be selective, that will be across various markets." In terms of how property rates will develop into 2005, Mr Pagnani said: "I think in 2005, in terms of the worldwide property premiums, we expect greater declines in the neighbourhood of 5% to 10%."

Wilhelm Zeller, chief executive of Hannover Re predicted a relatively stable renewal season, believing that despite a decline in rates in some lines, overall there would be more rate increases than decreases following the pattern of the last few years. However, Mr Zeller added that for him the key factor was not whether rates were rising or falling, but from what level they were rising or falling. "Even if (rates) do 'go south' a little bit by 2%, 3% or 5%, which I do not predict," he explained, "then we are still, in most lines of business, at a very healthy rate level, and this is what reinsurers need." Mr Zeller was keen to emphasise the point that for many of the major reinsurers, 2004 will be the first year that they have recorded a "real profit" since the events of 9/11 and the subsequent stock market collapse of 2002.

There is, however, a clear difference between the current softening of the market and previous soft cycles. Whereas the last cycle was driven by the availability of cheap reinsurance, according to Rolf Tolle, director of the Franchise Board at Lloyd's, this is not the case this time round.

"Yes, rates are coming down on the reinsurance side," he said, "but it is the insurance market which, in my opinion, is driving the softening (of the cycle)."

Unsurprisingly, the finger of 'blame' was once again wagged at the brokers for forcing the market down, an accusation which James Vickers, managing director of Willis Re was quick to deny. "That is a well worn argument," he said. "But the reality is that brokers don't accept risk, we have to find underwriters and carriers who will accept that risk, so I don't really believe that the brokers can be held to be driving the market down."

However, Toby Esser, Group CEO of Cooper Gay, was more willing to accept a degree of blame for the pressure being placed on the reinsurance sector to reduce prices. "Brokers are chasing the market down and there can be no doubt about that. Bu then that's a broker's job to chase the market down." Although he agreed with Mr Vickers that it still required "somebody to actually write the business". In terms of who was in the driving seat when it came to influencing pricing, Mr Esser said: "I don't think that there is any doubt at the moment that the brokers are more competitive than the reinsurers, so the brokers are really chasing the price hard."

Cycle management

As Moody's highlighted in its Global Reinsurance Industry Outlook, despite the decision to place the reinsurance sector on a stable footing, there are numerous challenges which remain on the horizon for reinsurers, challenges which will be heightened by moderating market conditions. The report states that reinsurers will find themselves having to answer two important questions as the hard market recedes and with "pricing discipline beginning to fade".

"First, how reliable is our balance sheet following - in more than a few cases - multiple repair jobs? And second, do we have the information systems and the cultural will to identify and combat the market's inevitable return to uneconomic pricing levels?"

The effective management of the cycle is vital if reinsurers are to avoid the mistakes of the past, and key to such effective management is the implementation of a culture which permeates all aspects of the company from Board level down, and which actively encourages people to manage the cycle. "You have to have a culture which encourages people to manage the cycle," said Henry Keeling, CEO of XL Re, who put the onus firmly on CEOs to implement such a culture. "Take care of the capital that is not used through the cycle - which is another CEO responsibility - and reward people for not writing unprofitable business. Forget what the sirens of the investment community are saying, that we have got to have growth, and manage your business according to the bottom line."

Rolf Tolle confirmed that Lloyd's fully supported the idea of focussing on the bottom line even if it is at the expense of the top line. "We at Lloyd's have said that we are prepared to reduce the top line if that is necessary in order to keep the bottom line, because we have to produce a proper return from the cycle."

A further factor in helping focus the minds of CEOs on adequately managing the cycle is the threat of the consequences they could face in the current Sarbanes-Oxley environment. As Geoff Bromley pointed out, "We are living in an era now where the regulatory regimes ... mean that CEOs will think very hard and long about the fact that they have made the undertaking to manage the cycle ... and the consequences of not adhering to that are going to be extreme." Whether or not such consequences will be sufficient to prevent reinsurers from making the same mistakes they have made in the past come the change of the cycle, however, remains to be seen.

Investment analysts circle

One other factor which set this year's Rendez-Vous apart from previous years was the number of investment analysts to be seen weaving their way amongst the tables of the Cafe de Paris, a fact which appeared to put many regulars on edge. At present the investment community seems to be uncertain as to the investment potential of the reinsurance sector. Speaking in London prior to the Rendez-Vous, Ben Cohen a director at UBS Investment Research said that investors were sitting on the sidelines when it came to the big stocks and the major players. "People are looking for greater clarity from the companies with regard to their reserving, with regard to their strategies and with regard to their capital position in the medium term."

This uncertainty can only have been intensified by the reserving crisis which has hit Swiss reinsurer Converium and which resulted in its downgrade to 'BBB' on 10 September by Standard & Poor's. Benjamin Gentsch, Executive Vice-President of Converium expressed his disappointment and disbelief at the move by S&P. In terms of the company's core business plan, Mr Gentsch said that, "we intend to stay in business, we intend to service our clients, we intend to underwrite business for the underwriting year 2005, but what that means in terms of magnitude, that is, for the time being, open." The questions now for Converium, as the renewal season approaches, are how many cedants will view the 'BBB' rating as a sufficient level of security for their reinsurer, and will they be removed from security list for the next round of renewals? "It is down to the individual client," said Mr Gentsch, "whether for him management credibility is damaged as well, or whether for him the franchise is completely damaged."

Comparing Converium's situation to that experienced by XL at the beginning of the year, when it announced a reserve charge stemming from adverse development in its North American reinsurance operations on casualty business written between 1997 through 2001, Mr Keeling explained that the difference was that while Converium faced a similar size of reserving problem, as a percentage of the company's balance sheet it was a huge percentage, which proved a critical issue.

One knock-on effect of the reserving hits being taken by reinsurers on the casualty side is that a number are choosing to move away from this sector, towards those shorter tail lines which are perceived as being easier to manage. However, by moving into a new line of business, this can raise concerns for both cedants and shareholders alike. As Mr Keeling explained, while shareholders may appreciate the role of diversification in terms of easing capital strain, concerns arise over the degree to which management fully grasp the risks inherent in those lines which they are entering. The same concerns apply to the cedants, confirmed Nicholas Michaelides, chief reinsurance officer at ACE Overseas General. "We want (the reinsurers) to understand the risks at least as well as we do, if not better, because we want that business relationship to be two-way."

The reinsurance sector has been given a stable outlook, but perhaps a more suitable term would be 'balanced'. It would seem that there are a number of different forces buffeting the sector at present, each one with the potential to knock the industry off its stable pedestal, whether it be failure to maintain underwriting discipline and to effectively manage the cycle; further announcements of reserve deficiencies resulting in even fewer reinsurers deemed to have sufficient security; or further increases in the intensity and frequency of hurricane activity. Whether or not the industry can maintain its balance only the next twelve months will tell.

This article is based on interviews conducted for GR TV, sponsored by XL Re. All of the programmes broadcast at the Rendez-Vous de Septembre can be viewed at