If Monte Carlo is the place where the risk professionals put on their polo shirts and swap market gossip in the sunshine, Baden-Baden is where they roll their sleeves up and get down to the nitty gritty of business.

It must be a strange sight for any unsuspecting “civilian” arriving in the pretty German spa town during the last week of October. The sight of hundreds of men (and some women) in dark business suits crisscrossing the town, clutching their bulging briefcases, seems at odds with the otherwise sleepy autumnal scene.

But these people are on a mission. With the January 1 reinsurance renewal looming large on the horizon, buyers, brokers and reinsurance underwriters are starting to negotiate their deals.

It’s nice to imagine these discussions taking place in the relaxing, hot spa baths that the town is renowned for. The reality, however, is a scene of busy executives sweating contract details in overcrowded salons and hospitality suites around the town’s many plush hotels.

What are the big renewal related issues that will exercise people’s minds in Baden-Baden this year? Seymour Matthews, managing director of reinsurance at Lloyd’s broker Cooper Gay, expects some interesting discussions around reinsurance pricing this year, with reinsurers attempting to get into the driving seat.

“I believe reinsurers will be stressing the need for them to make underwriting profits in the current investment climate,” he says. “If reinsurers show a united front this could be a real turning point.”

Mr Matthews says that unexpectedly high losses from Hurricanes Ike and Gustav will also contribute to increases in reinsurance rates: “Cat losses for 2008 are considerably higher than the modeling agencies predicted.”

“The question European primary insurers will ask is whether they should be on the hook for US losses,” he says. “My personal feeling is that the days of the many paying for the few are over.”

Mr Matthews fears that the complex dynamics at play in the run up to this year’s renewals could slow things down.

“I worry that people will still be talking about all this in a month’s time and that the renewals will be very late again,” he told lloyds.com. “Cedants who are not prepared and leave decision making too late could be in for problems. Getting good advice early from their broker is key.”

Sharon Gallagher, underwriter at Lloyd’s insurer Kiln and a Baden-Baden veteran, agrees that reinsurance pricing will be the main topic on the agenda especially in light of recent events.

“Reinsurers are effectively loaning insurers their capital—in the current environment that is an expensive thing to do and with investment returns reducing, pricing cannot reduce, even for cedants without losses to their programmes,” she says.

“Although 2007 results were profitable, many of them were propped up by significant old year reserve releases and 2008 has seen its fair share of losses, whether large risk XL losses, Central European wind and hail losses, mid-West floods or the recent hurricanes [Ike and Gustav],” Ms Gallagher explains.

Ms Gallagher says that recent events emphasise the need for good risk management by reinsurers and insurers alike. “Whilst the reinsurance industry has made huge strides in recent years with cat modelling and, at Lloyd’s, with the Realistic Disaster Scenario returns, we cannot be complacent,” she warns. “As recent events in the banking industry have shown, models are only a guide and are no substitute for understanding the underlying exposure of a portfolio.” 

For their part, in the current climate, cedants need to factor in the possibility that their reinsurers might not be willing nor able to pay up when the large loss happens. “Regulators’ security rating requirements can push cedants towards concentrations of cessions with a handful of reinsurers when the whole basis of our industry relies on spread of risk,” she says. “We must ensure that we do not simply become slaves to ratings but that the benefit of diversification is given its proper place.”

NOTE: Baden-Baden was officially given its double barreled name status in 1931 and derives from “Baden in the state of Baden” – as distinct from other Badens in other German states.

Tags: Baden-Baden, Renewals

This entry was posted by Garry Booth on Thursday, October 23rd, 2008 at 4:08 pm and is filed under Insurance Commentary.