Talk about climate change! Here in Baden-Baden it’s rained more or less continuously throughout the reinsurance congress. No-one seems that surprised or bothered. Everyone is preoccupied. Reinsurers, cedants and brokers trek through the park in the centre of town, collars turned up on their overcoats, oblivious to the heron stock still in the swollen river Oos.

Alternating between the grand hotels that stand along the riverbank—Badischerhof, Europaischerhof and the Brenners—delegates’ minds are filled with renewal rates, terms and conditions, solvency and profitability.

“I’ve been coming here for 15 years and I have never known a renewal like this one,” a veteran broker told me.

What’s different is that life has suddenly become very complicated. Like the weather, the business climate has become unpredictable and impossible to call. It has changed, but no-one is really sure what is going to happen next.

No doubt some people are missing the familiarity of the underwriting cycle: up or down, at least people knew where they stood. At Baden-Baden this year there is the unreal feeling that anything could happen.

In previous years, if there had been a storm like Hurricane Ike in the run up to renewals, everyone knew what to expect. Capital would be depleted, the market would harden and then later, new capital would come in to take advantage of it. This year, it’s not so simple. There are three elephants in the underwriting room: capital market meltdown, falling share prices and global economic recession.

Primary insurers who want to maintain their current business model (ie stay in business) are suddenly more dependent on reinsurance than they have been for a long time. It is virtually the only form of capital relief left open to them given the state of the markets. They want to retain less risk, they want to buy more reinsurance.

But reinsurers live in the same world. They are less exposed to the markets, but they just got smaller as well. As well as taking a hit on the asset side of their balance sheet, they’re finding (to their astonishment in some cases) that losses from Ike just keep on coming.

Surely that means that reinsurance prices can be jacked up, revealing to reinsurers at least a silver lining behind the clouds over Baden-Baden? Not so, apparently. While some reinsurers are predicting big rate increases (notably Munich Re which issued a press statement on Monday saying it expected a double-digit hike) others are less bullish.

Lloyd’s own Rolf Tolle, speaking at the Baden-Baden symposium, said he thought it was too early to call the bottom of the market. He said there is a justifiable fear among reinsurers that if they increase their prices they will lose the business.

At the same event, William Hawkins, the outspoken insurance research director at Keefe, Bruyette & Woods, pointed out that unlike previous post hurricane scenarios reinsurers have not actually lost a huge chunk of capital.

On the contrary, as other industry commentators pointed out, reinsurers were more or less prepared for Ike and Gustav having learned their lessons well. Now they are more likely to be hoarding capital because they don’t know what is going to happen next to them, nor how long the current turmoil in the financial markets will last. By keeping capital levels up, that may contribute to keeping the market soft going into next year

It is all very confusing. But at least it is keeping everyone’s mind off the rotten weather.

Tags: Baden-Baden, Reinsurance, Renewals

This entry was posted by Garry Booth on Wednesday, October 29th, 2008 at 5:35 pm and is filed under Insurance Commentary.