The usual Baden scene is of executives with collars turned up against driving rain, criss crossing between the posh hotels where they meet to earnestly discuss the cathartic effect of the latest natural or financial disaster.

But this year it is different in lots of ways. The sun is shining for a start. Also, while the financial crisis hasn’t actually gone away, the markets are more settled than this time last year. Just as important, it has been a benign year so far in terms of catastrophe losses.

It is Autumn and there is still plenty of time for a windstorm in Europe – but for a lot of the reinsurers here it feels a little like Spring.

There are a number of reasons for that. One is that, having come out of the credit crunch relatively unscathed reinsurers have proved the resilience of their product to their clients, according to underwriter Sharon Gallagher of Kiln Reinsurance 510. “Reinsurance capacity is stable and that’s valued by clients. It is incredible in the circumstances just how stable reinsurance pricing is,” she said. 

Richard Chattock, active underwriter with Montpelier Syndicate 5151 agrees that there is increasing recognition of the value of secure reinsurance. “Everyone is aware that the capital markets could go bad again,” he said. 

Reinsurers are even optimistic about the possible effects on their business of Solvency II, the regulatory regime that will take effect in 2012. In his traditional breakfast press call in Baden-Baden, Munich Re director Ludger Arnoldussen said that Solvency II would lead to a renaissance for reinsurers.

Under the new Solvency II rules, recognition of reinsurance and its capital relief effect is no longer limited to 50% (as under Solvency 1) with unlimited cessions possible. “The value proposition of reinsurance companies is greatly improved as a result,” Arnoldussen said.

Reinsurance brokers in Baden-Baden have an extra spring in their step too. They point to a growing trend for cedants to spread their reinsurance shares a little more widely in order to reduce counterparty credit risk. Nick Frankland, chief executive for Guy Carpenter Europe said it makes sense for insurers to achieve a spread of reinsurance within a band of acceptable security: “It is better than having a concentration in that same band,” he said.

Lloyd’s franchise performance director Rolf Tolle, holding court from a comfy chair in the Brenners hotel, said he discerns a willingness among cedants to diversify their reinsurance panels. He believes that Lloyd’s will be a beneficiary of the trend: “We see the amount of business being offered to Lloyd’s is increasing,” he said. “We’re in a good position in terms of being able to offer syndication with good security.”

Of course, Baden-Baden is not completely changed in character and arguments about the necessary direction of the market still fill the air. Mr Tolle, who has been attending the meeting since the late Seventies, has witnessed the market’s ups and downs over the years.

This year is his last as a representative of Lloyd’s because he steps down at the end of the year, handing over to a new director of underwriting, Tom Bolt. “It is clear that an improvement in pricing, terms and conditions is needed in both the reinsurance and underlying insurance business. But I suspect the market will stay flat,” he predicts. “In a sense the market is a victim of its own success because capital has not been destroyed – it has been replenished.”

The survey, which tracks changes in insurance policy renewal prices as reported by North American corporate risk managers, finds that commercial insurance buyers are getting good deals because the global economic recession has suppressed demand for insurance capacity, making underwriters fight for diminishing premium dollars.

The survey cites average general liability premiums, which fell 3.7 percent, and average workers’ compensation premium, which was down 4.5 percent as evidence. Declining sales and payrolls, which are used to calculate premiums, were behind the falls, it explains.

Advisen’s Dave Bradford, editor-in-chief of the survey, said carriers are posting underwriting losses, “but in this recession, they have found it nearly impossible to push through rate increases except in a few especially distressed areas.”

Property insurance policies renewed in the third quarter with essentially no change in average premium. Directors and officers liability (D&O) policies also renewed with no change in average premium.

RIMS spokesman Daniel H. Kugler, a risk manager at tool maker Snap-on, Inc. commented that many companies are buying less insurance, and underwriters feel pressured to keep prices low to hold on to the remaining premium dollars. “It’s still a buyer’s market, and it looks as if it may stay that way for a while,” he said.

Another new report, this time from broker Willis, echoes RIMS findings, saying that “marketplace forces that have led to sometimes frenzied competition among insurers may remain in place into 2010”. The detailed report goes on to explain exactly how benign weather and different marketforces have combined to keep prices down, right across the P&C board.

But Willis’s chairman Joe Plumeri says in his intro to the study that buyers should curb their enthusiasm: “While undoubtedly appreciating the windfall of softening rates, risk managers must also consider the issues of market security and counterparty risk as never before.”

Sage advice: chasing reductions is fine but quality cover does come at a price – and this is the worst possible time to find that your insurer isn’t there when you most need him.

On the other hand, the market for all other sectors continued to be extremely competitive with rates trending down, ample capacity and the broadest terms and conditions seen in years, Aon says.

Most insureds should expect to see stable rates in the short term, brokers agree, while rates for financial institutions are expected to continue to increase.

Willis in London also says that the commercial sector continues to resist the sharp rate increases for D&O insurance seen in the financial institutions sector, with the average premium for commercial business falling 5% in the second quarter. In contrast, some financial institutions have seen “double digit” premium increases, in percentage terms.

Willis stresses that the 5% reduction is for commercial clients with strong risk profiles.

But even these buyers could soon be seeing prices trend up, both brokers warn. “The delicate balance between the forces holding D&O prices down and the need for rate increases could soon shift in the favour of underwriters,” said Michael D. Rice, national practice leader of Aon’s financial services group.

Commenting on the findings of the Willis survey, Julian Martin, executive director of Willis FINEX Global, warned, “Owing to the economic downturn, we are experiencing an increased level of scrutiny and underwriting analysis, meaning that is essential for renewal negotiations to begin early in order to deliver timely renewals.”

You have been warned.

Aon predicts that corporate CFOs will have more say in structuring risk transfer solutions and at the same time, more [non-financial] companies will appoint chief risk officers to complement their risk managers.

Aon also envisages greater use of technology to accurately capture business risk information in order to satisfy the growing demands of insurers fed up with spreadsheets. Better still, the systems will utilize risk data standards so everyone talks the same risk language.

That in turn will lead to greater risk differentiation and clients not being tarred with the same brush by insurer.

Growth in enterprise risk management will be accompanied by insurers innovating around new risk transfer products that hedge commodities prices, for example, and weather related risks. Very big industrial companies will tap the capital markets for facultative capacity.

Compelling as it is, something is missing from this picture and that’s the new risks that are lurking over the horizon and will challenge risk managers and their insurers in the future.

Effective risk management with a systematic approach to structures and risk transfer is to be welcomed. But knowing about the potential risks around the corner so that systems can be adapted to the real world is crucial as well.

That’s why forward looking projects like Lloyd’s 360 Risk Insight and the Lighthill Risk Network are so important.

OK, pirates are making the headlines but the sector’s main worry, according to IUMI president Deirdre Littlefield, is the global economy and how conditions in their clients’ business will affect marine insurers.

Littlefield says that trading conditions for the shipping industry are dire and the short-term prospects are bleak. “Every sector is in trouble despite one or two bright spots. A lot of companies have already folded or filed for bankruptcy, and more will follow,” she said in a press call on Sunday.

This is putting a lot of pressure on marine insurers who are trying to cope with greatly reduced ship and commodity values, and far fewer ships trading as more go into lay-up or lie idle.

The number of total losses has stabilised, but the future claims picture is very worrying Ms Littlefield says, because owners are deferring essential repairs and maintenance.

Yet marine insurance market capacity continues to be plentiful. The danger now is that many underwriters will be tempted to cut rates and make other concessions in order to maintain market share as the amount of new business available continues to dwindle.

“We have seen this cut-throat situation before, of course, but never at a time like this when the shipping industry is literally on its knees,” she told IUMI delegates.

While it is true that there is a downturn in the global economy, some regions are suffering more than others. Those differences are feeding through to insurers and, as one broker recently pointed out, marine insurance is becoming more regional in character.

In its recent outlook paper for the marine insurance sector, Aon points out that regional centres have a different take on pricing. US insurers are pressing for rate increases and seem to be losing business to London as a result. In mainland Europe, different countries such as the Netherlands have their own dynamics.

Norwegian underwriters likewise are said to be defending their business against ‘outside’ interests. Meanwhile, Singapore is growing as the marine insurance hub for Asia, albeit on the back of London companies moving in.

What an interesting evolution: at a time of globalisation the regional marine insurance markets are becoming more and more differentiated in terms of pricing. And yet the main beneficiary in terms of share and stability, according to Aon, seems to be London.

Each year at the beginning of September the industry’s decision makers fill the hotel lobbies of the tiny principality to start their contract renewal discussions.

They’ve been doing it for over 50 years—and every year seems to deal a new hand with a different wild card: a run of costly nat cats, terrorism, tighter regulation or a sapping financial crisis.

What will it be this year? With a relatively calm hurricane season so far and financial markets stabilising, could it be that lady luck is smiling on reinsurers?

New numbers just out bode well. The Guy Carpenter Global Reinsurance Composite, which tracks earnings, posted an aggregate increase of US$4.6bn for the first six months of 2009, compared to an aggregate loss of US$3.5bn for the same period last year.

Unrealised and realised investment losses fell by 87% and 43% respectively year on year. Underwriting earnings for the composite rose by 9.6%, compared to last year, reaching US$2.2bn, with combined ratios dipping from 85.6 to 84.9.

This combination of recovering asset values and positive earnings helped restore balance sheets too: aggregate shareholders equity for the Guy Carp composite climbed by 8.2% during the first half of 2009.

What does all this mean for premium rates? The big picture, according to brokers, is for the rating environment to be relatively unchanged from the July 1 renewals: in other words ‘holding firm’.

But a lot can happen between now and the January 1 call for reinsurers to ‘faites vos jeux’.

Related links:

RVS—Les Rendezvous de Septembre

The majority of airline insurance contracts are renewed in the latter half of the year and buyers are bracing for more expensive premiums. They know there is a good reason for rates to rise. The loss figure for the year to date is horrific.

The loss figure at the time of writing is US$1,659m compared to US$798m for the same period in 2008.

The year started badly for underwriters, with the ditching of an Airbus A320 into New York’s Hudson in January. Incredibly no-one was killed in that accident. But then in February a passenger plane crashed into a house in Buffalo New York killing all 49 people on board and one person on the ground.

June 2009 alone was the most expensive month ever for aviation claims under standard hull and liability classes, excluding September 2001.

In June, an Air France Airbus A330 crashed en route from Rio de Janeiro to Paris with the loss of 228 people onboard; later in the month, an A310-300 operated by Yemenia was lost in the Indian Ocean with 153 passengers and crew (there was a single survivor).

The average price of lead hull and liability premium rose by over 20% from July to August (though removing one big US renewal from the figures gives a more realistic increase for the year to date of 14%).

Ten percent premium reductions were registered in previous years so clearly something is happening.

And it isn’t simply the worsening claims record. Aon says that the supply and demand equation is being affected by shrinking capacity as capital providers head for the exits.

This view is backed up by news coming out of the Lloyd’s market at the halfway point. In its interim results report, the prominent Lloyd’s aviation insurer Amlin notes that the class has not been ‘attractive to us’ for an extended period.

But Amlin also confirms that the recent heavy losses are providing impetus for ‘much needed rate increases’ that it anticipates will come through this year.

Some people talking up the market have suggested that increases of 30-40% are achievable/necessary. The reality, without another major disaster, is an average increase of 20%, however.

Related links:

Air disasters timeline, BBC News, 15 July 2009

The council said it was ‘disappointed’ at the ruling, maintaining that there had been no link between the birth defects and the reclamation work. Corby says it will appeal against the High Court ruling and start mediation with the families and claimants involved in the case (BBC news, 19 August).

Simon Johnson, director at Lloyd’s broker Aon, said that the Corby litigation could stimulate more legal action particularly affecting councils that have invested in regeneration and built on brownfield sites. “Most worrying, defence and other costs could run into millions of pounds and may not be insured,” he commented.

In recent years industrial pollution issues have been dominated by global climate change or other environmental concerns. But as the Corby case shows, pollution incidents can end in human tragedy. The misery is often prolonged as legal disputes take years to unwind.

In fact this year is the 25th anniversary of the Bhopal disaster. Poison gas leaked from the pesticide factory operated by Union Carbide killing thousands and injuring many more. In 1989, Union Carbide agreed to pay $470m in compensation.

But like pollutants, the repercussions cannot be easily washed away: in Bhopal 100,000 people say they are chronically ill as a result of the accident. And this month an Indian court reissued its arrest warrant for Warren Anderson (BBC news, 31 July), who was the head of Union Carbide when the accident happened.

Related links:

Corby Borough Council
The battle for birth defects answers, BBC news, 29 July 2009
Birth Defect Victims Win ‘Toxic Soup’ Case, Sky News, 29 July 2009
1984: Hundreds die in Bhopal chemical accident, BBC On this day

The piece describes how the country’s existing ‘hotch-potch’ of energy sources will not be able to cope when economic growth resumes.

It paints a bleak picture: North Sea gas is running out; nuclear power stations are being shut and not replaced fast enough; coal is too dirty for the 21st century; renewable resources like wind and waves are not yet up to the job.

Unless radical action is taken the predicted energy shortfall will have to be met from imported gas, a large chunk of it coming from (or via) unpredictable countries, such as Russia.

Complicated by global risks to do with economic, geopolitical and climate change issues, future energy security risk is incredibly hard for politicians to manage. But the Economist has two suggestions that may help prevent blackouts.

First, infrastructure: companies must be persuaded to build more gas storage so that the impact of price rises and supply interruptions can be softened. More cross Channel electricity supply cables to facilitate a Europe-wide power grid would help security as well.

Second, carbon must be taxed to encourage companies to invest in long-term, expensive, technology-heavy projects such as nuclear plants, cleaning up coal and tapping renewable sources of power.

Not only is Willis Tower ‘iconic’ because it is the tallest building in the western hemisphere: it is important because it is being comprehensively ‘greened’ by its owners (pdf), at a cost of $350 million.

The building, which already meets Leadership in Energy and Environmental Design (LEED) criteria, is undertaking sustainability initiatives above and beyond those used by the United States Green Building Council to rate a green building.

The modernisation includes:

—Efficiency improvements to the building’s exterior envelope and 16,000 windows. Strategies to achieve a thermal break of the curtain wall are also being investigated;
—Mechanical systems upgrades in the form of new gas boilers that utilise fuel cell technologies, which generate electricity, heating and cooling at as much as 90% efficiency;
—The tower’s 104 high speed elevators and 15 escalators will be modernised with the latest technology to achieve 40% reduction in their energy consumption;
—Water savings that will be realised with conservation initiatives to reduce water usage by 40% and save 24 million gallons of water each year;
—Lighting that will be upgraded to save up to 40% of lighting energy consumption;
—Wind turbines to take advantage of the tower’s height and unique set-back roof areas; Solar hot-water panels will help heat water for the building; 
—Green roofs that can sustain high-altitude conditions, and that will be among the tallest in the world, will be tested to reduce storm water runoff, improve insulation, help mitigate the urban heat island effect, and provide pleasant vistas for tenants overlooking the areas.

Willis Tower is leading the way at an important time. There is a growing body of opinion that we’re not doing enough to mitigate carbon emissions. Only this week, an international group of respected academics called on world leaders to abandon their current policies on climate change and concentrate instead on improving energy efficiency and decarbonising energy supply.

The authors of a report published by the London School of Economics’ (LSE) Mackinder Programme and the University of Oxford’s Institute for Science, Innovation & Society, How to Get Climate Policy Back on Course (pdf), say the strategy based on overall emissions cuts has failed and will continue to fail.

Certainly, there is no proof yet that the stumbling Kyoto Protocol will have any effect on reducing global emission. Whereas the direct action such as that taken at Willis Tower will at least show immediate tangible results.