Collapses, closures, and strategic withdrawals have laid a groundwork allowing reinsurers to bargain from a position of relative strength at this year's meetings in Monte Carlo and Baden Baden. How will they play their cards? Cautiously, one hopes. If their mettle is insufficient to bring rates in continental Europe closer to technical profitability, another run of widespread losses could tip the balance for many markets, and could be calamitous for the industry itself. However, if reinsurers choose to drive rates too high, all but a handful may regret it in the longer term.
Cedants started to test the market as early as July, but Baden Baden and the Rendez-vous present the first opportunities for major negotiations since the realisation that 1999 was the most catastrophic year on record, bar one. They also provide the first chance to set new corporate policy regarding terms and conditions following the expiry of ubiquitous multi-year treaties. In the face of massive industry overcapitalisation, widely regarded to be equal to about twice that which is required to meet the needs of cedants worldwide, reinsurers will need to drag the market up. Without a string of early losses in the 2000 hurricane season, the challenge will be significant.
But it may well be that the worst of 2000 is yet to come. As last year's December storms in western Europe and Scandinavia showed, the rules of the game can change mid-turn, even as underwriters scramble to get to their next appointment at the Café du Paris. Some reinsurers, weakened by the storms and 1999's three major earthquakes, are already decidedly precarious. Another major blow could knock them over, or push them out. American capital with only a passing interest would be forgiven for turning tail, and applauded by fickle shareholders. More established players could benefit, particularly those fully engaged in the cheating phase, but with the resources to play there for a few years to come. However, their pricing strategy must not be based solely on the desire to maintain and develop market share.
Equally important will be the reaction by underwriters to cedants who have realised that their limits are woefully inadequate. Some have already ratcheted up the top end, even before the renewal season began. But an overall price increase that is simply commensurate with an overall increase in exposure will not correct the market. Selling more, more-expensive cover to each client should be the headline goal of every reinsurer who wants to play in Europe this September and October. For some it will be a question of survival: senior managers are looking over their shoulders to see almost daily deterioration in the 1999 account. 2000's storms have proved far more problematic than anticipated. Particular markets (pity London's casualty underwriters) are facing huge collection and commutation challenges down under. Cash flow has turned negative at some companies that should have known better.
Long-term policies will have an impact on all this. Few cedants, if any, were able to get terms to extend the multi-year treaties due to expire this year. Meanwhile, however, the fashion for multi-year cover has filtered down to primary insurers, who have long preached the gospel of long-term relationships to ultimate insureds. But many of those same cedants consistently have showed their willingness to bargain hunt when it comes to reinsurance capacity. As they move further into agreements granting insureds three and five years' cover at fire sale prices, how will they cope with the reinsurance markets' demands for more? One option for them would be to turn away from traditional markets seeking unpalatable, unsustainable rate increases and seek alternative suppliers. No matter how many lower-tier and simply silly markets are wiped out, or how great a pressure is brought to bear by the evolving retrocession squeeze, someone ready and willing to undercut will always appear.
But this time extremely steep rises reflecting the quantum of 1993 may be neither achievable nor desirable. Few underwriters have expressed genuine satisfaction with the average rate increases achieved in continental Europe over the past nine months. Those reinsurers with the largest share of traditional business in the region are said to have implemented increases for 2000 which caused many London market players, and particularly long-absent Lloyd's syndicates, largely to maintain their judgment that most of Europe is a no-go area. Reasonable rate rises could tempt such carriers back to Europe, but a massive upturn would almost guarantee continued cyclicality, which in turn would ensure that they do not remain in the game for the long haul. Yet some of the evacuees are beginning to scent the possibility of a return. “Things could be happening in France,” one catastrophe underwriter said, mentioning the storms. “We will see.”
A better sentiment, perhaps less driven by arbitrage, would be “we will see to it,” but a rating sea-change for the western European market is in the hands of a few majors. At least two of the big four took a potentially climacteric pounding in December, although the majors will weather further losses as going concerns, if not happily. Further, they are almost entirely self-reliant, with little need for retrocessional capacity, except as a comforting backstop. Twenty of the world's approximately 120 reinsurers are controlled by just four parent companies; between them the mega-groups have the wherewithal to turn the market, but they displayed no intention at the last renewal to do so with gusto in continental Europe. Instead rate on line (ROL) increases in the order of 20%, along with increased limits, were the norm for companies battered by Lothar and Martin, although, remarkably, many others renewed as-is, while in rare cases prices jumped by 40%.
Such rises pale in comparison to rises achieved in Scandinavian markets at 1 January 2000, where a different cross-section of the reinsurance community consistently realised rises of 100% and occasionally 200%. A French professional reinsurer pointed out that local pre-storm rates had been less depressed than those achieved by the heavily cycle-driven, less-loyal buyers in Scandinavia and the UK, and were “sometimes even adequate.” He stressed the value, from the cedant's perspective, of buying with a long-term view. But that will not help those reinsurers whose cash flow has turned negative, or who must again patch a huge hole in their accounts with profits from life business.
Many in London have complained about dismal rate increases achieved across the Channel. The big four, and particularly the two, have been accused by some of low-balling to maintain market share. However, they perhaps have in mind also the defence of the role of traditional industry players and the erosion of the cycle itself. The greatest frictional barrier to a significant market turn at 1 January 2001 is the capacity overhang, that extra dollar, for every dollar deployed, of parked capital lying in wait for a very hard market. Much naïve and fair-weather capital has fled, and more will follow it, but even greater sums of sophisticated money are lodged in tax-friendly jurisdictions, ready to be meted out by experienced and downright clever London-educated underwriters and strategists. What would be the impact of the full, opportunistic deployment of $4 billion of reinsurance capacity belonging to a US personal lines mutual, through its connection with a sophisticated Bermuda facility? Or of an aggressive attempt by maturing Bermuda giants to bring their accumulated gains of the mid 1990s back to the table, and re-deploy the money with a view to taking the peaks out of the reinsurance cycle (in part through names as warm and fuzzy in Europe as SAFR and Le Mans, or as new, but well grounded, as Danish Re)?
That worry may be the reason why the European leaders have, so far, resisted the temptation to double ROLs in France and Germany. Perhaps everyone should send each of their chairmen a letter of thanks, recognising that they have not acted collectively to turn on its head the rating environment in the traditional reinsurance markets of Europe. Ironically the Bermudians, so disparagingly viewed in the mid 1990s, have emerged as a true force to be reckoned with. An insurance cycle with deep troughs and no peaks would be a grim place indeed in which to do business.
Monte Carlo Rendez-vous 2000 and the Baden Baden meetings will this year be more interesting and more influential than was imaginable for recent preceding events. Convergence is now. This is not convergence in the sense of the coming together of reinsurance and financial markets, but convergence of the issues which dominated the reinsurance industry over the 1990s: consolidation, globalisation, the flight to quality, excess capacity, catastrophes, cyclicality, long-term treaties, the rise of Bermuda, and the might of the giants. The turn of the cycle will be the core of every conversation, but behind it is the influence of a significant turning point for the industry itself.