From 8am the Baden-Baden streets are criss-crossed with soberly dressed business people, moving between crowded hotel salons and meeting rooms where intense negotiations take place over the terms, conditions and prices of next year’s reinsurance deals.
From the immense market noise generated, everyone is trying to discern which way pricing is going and what are the factors that will influence it on a company to company basis.
Business barometer
A symposium hosted by Lloyd’s reinsurance broker Guy Carpenter usually serves as a business barometer. Carpenter’s Chris Klein set the scene, describing a reinsurance market that was standing up to unprecedented catastrophe losses in the first half of the year, particularly from the earthquakes in Japan and New Zealand – as well as continuing uncertainty in the capital markets, a flat economy and sustained low interest rates suppressing investment returns.
Following speakers, which included Allianz board member Clement Booth and investment analyst Chris Hitchings of KBW, echoed that despite the difficult environment the reinsurance industry was not sufficiently stressed for rates to rise across the board.
Pricing is still soft, according to Booth, who said: “There are as many competitive reinsurers in the game as there are those who are sticking to technical rates.”
New challenges
Lloyd’s Performance Management Director Tom Bolt made a graphic description of the dangers facing all companies: “The industry traditionally provided cover against the ‘four horsemen of the apocalypse’ – pestilence, war, famine and death,” he said. “Now the industry is confronted by new challenges.”
Bolt believes low interest rates, tough economic conditions, the prospect of inflationary pressure and the uncertainty created by new European solvency regulations have combined to make this the most challenging time for the industry he’s witnessed since starting in 1985.
He said that prices have increased a little in some pockets of business in response. “But the challenge to make money on underwriting activities has never been higher,” he warned.?Bolt said that Lloyd’s would work hard to protect its franchise and that the performance management directorate would continue to be vigilant in its monitoring of underwriting standards and business planning in the run-up to renewals.
Earlier this year Bolt asked energy underwriters to track their aggregate exposures as losses continue to develop from the Deepwater Horizon oil spill in the Gulf of Mexico. Now he wants the market to be aware of the possible fall-out from the financial crisis spreading deeper into professional liability classes of business.
He also said in Baden-Baden that catastrophe reinsurance underwriters should be aware that the full loss picture from earthquakes earlier this year has not yet emerged.
Proceed with caution ?Contingent business interruption losses from underlying insureds or developing structural damage to infrastructure could amplify cat losses, he cautioned: “The industry is not underreserved - but I’m not sure that this intermediate tail of cat losses is always being included in the calculations when people are making pricing decisions on prospective business.”
The picture will be clearer, for better or worse, next year in Baden-Baden.