The rating agencies raised the curtain on the Monte Carlo Rendez-Vous 2008 with a mixed message: the reinsurance industry is fit and healthy but it faces challenges ahead. In its global reinsurance industry outlook report, published to coincide with the annual meeting, Moody’s said that the outlook for the sector remains stable. Following two years of strong profitability and enhanced risk management processes the industry’s robust capital position places it on a solid footing to confront the softening market conditions, the challenges posed by continuing capital market turbulence and the threat of global economic instability.

Moody’s analysts think that the underwriting cycle will ultimately determine the fundamental credit condition of the market. And the picture there isn’t good, it believes as pricing continues to decline steadily in both property and casualty lines of business. Moody’s senior analyst Pano Karambelas says that while the industry has not yet breached the technical level, buyers are beginning to explore lower levels of retention for liability business which is a bad sign.

AM Best Co takes a similar view in its outlook report, sub headed “Profits Under Pressure”. It says that the market rode two years of solid earnings into 2008 (although 2008 isn’t over yet in terms of catastrophe activity) and that the industry’s capitalisation is healthier than ever. But it points out that loss from earlier soft market years are a lingering drag on some companies. With property and casualty rates softening again, current reserving isn’t likely to be sustainable or reliable for boosting earnings in future years, it warns.

Moody’s says that the market is subject to the vagaries of economic conditions in “multiple geographic zones” and faces the prospect of incremental volatility from several economic perils – notably the squeeze in the credit market and also the impact of inflation on underwriting margins. Inflation is important in long tail business but also on property business where prices for commodities and therefore building materials are soaring. It adds that this effect is not captured by cat models, but my guess is that some modelers may dispute that.

AM Best says that the weakening global economy and the turmoil in the equity and capital markets have added to the pressure on reinsurers. Not only are they watching their expenses but as the equity and credit markets falter, investment income also comes under pressure, providing less margin for error on the underwriting side.

Most of the talk in the hotel lobbies and bars of Monte Carlo is to do with rates and what will happen at the forthcoming renewals. AM Best says that renewal rates at July 1 showed a continued, steady descent best described as a controlled glide not a crash landing. So far, it seems like reinsurers are standing their ground in the face of intense pressure from cedants, it says.

In Monte Carlo this week, reinsurers will continue to talk the talk. But they will all be wondering how long they can continue to walk the walk.

NOTE: An unusual addition to this year’s Rendez-Vous is the presence of hundreds of super fit athletes here. An event known as the Ironman took place on Sunday morning. It involved a swim in the sea, a long bike ride in the mountains followed by a half marathon run – a total of over 70 grueling miles in fierce heat. But at least it is all over for them by Sunday midday. The iron men and iron women of the reinsurance world have got another two days of grueling meetings and cocktail parties to go.

Tags: Monte Carlo, Reinsurance

This entry was posted by Garry Booth on Monday, September 8th, 2008 at 10:35 am and is filed under Insurance Commentary.