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

Greater stability in the reinsurance market produced by signs of recovery in the financial markets, coupled with a lack of big underwriting losses in the first two quarters of 2009, compensated for reinsurers’ losses over the preceding 12 months.

In the property-intensive mid-year renewals, rate increases were moderate reflecting a lack of meaningful rate hardening in the primary market, Willis Re said. It pointed out that many primary insurers continue to face soft pricing, weaker demand and reduced investment yields while their prior-year reserve releases have largely run out.

Aon Benfield describes reinsurance markets as ‘firm but functional’. The broker’s renewal report stated that while the US reinsurance market for hurricane exposed programmes continued to harden, renewals of catastrophe exposed programmes outside of the US remained firm and were influenced by regional loss experience and reinsurer competition to participate in regional programmes.

Bryon Ehrhart, CEO of Aon Benfield Analytics, gave reinsurers a slap on the back: “Reinsurers have generally done a superior job of managing capital through these turbulent times and have continued to renew the core capacity required by our clients,” he said.

Peter Hearn, CEO of Willis Re said that the reinsurance industry is providing sufficient capacity at acceptable prices to its client base this year. “Nine months ago, this outcome was very much in doubt,” he said. “Now, this relative stability will largely hinge on whether positive pricing trends emerge in the primary insurance markets and the level of major catastrophe and financial loss activity.”

Guy Carpenter, the reinsurance broking unit of Marsh concurred, saying that stabilisation in the global financial markets has contributed to the steadying of reinsurance rates, ‘with capital deterioration slowing markedly from the rapid pace witnessed in 2008’. As a result, reinsurance supply remains generally adequate to meet demand.

The key findings of the Willis report (pdf) are:

• Rate increases in the region of 10 to 15% were achieved in capital-intensive classes such as peak zone US catastrophe.
• Merger and acquisition activity has started to pick up, as those with stronger balance sheets seek to adjust their portfolio mix and/or acquire platforms in markets previously difficult to access.
• There is a continuing disconnect between buyers and sellers in the marine sector over the pricing of Gulf of Mexico energy-exposed business, with buyers looking to co-insurance and/or higher retentions in response to high relative prices.
• Rates outside US peak catastrophe zones have struggled to show much real increase as diversification of exposure remains a pricing driver.

The key findings of the Aon Benfield report (pdf) are:

• In the US, predicted hardening caused many programmes to be marketed and placed prior to July 1. Pricing changed at a level consistent with 1 June renewals—increasing 10 to 15%.
• In the Asian market, excluding China and Japan, there were no major changes in coverage, exclusions and conditions in property catastrophe lines. 
• In the UK, rate increases of up to five % were recorded in property catastrophe lines.
• In Latin America, property excess of loss prices rose by up to 5%, with broadly stable terms and conditions and higher levels of retention in certain programmes.
• In Australia, property catastrophe pricing increased by 10 to 15 % overall, and by 5 to 10% on loss-free layers, as a result of large losses arising from the Queensland storms in 2008 and the Victoria bushfires earlier this year.

The key findings of the Guy Carpenter report (pdf) are:

• In the US firm order terms (FOTs) for higher layers grew between 11 % and 14 % relative to 1 July 2008 FOTs, while slightly larger increases—14 to 16%—were realised at lower layers.
• In Latin America preliminary data varied by country, but upward pressure on pricing was offset by supply and local market competition, which keep reinsurance rate increases contained.
• The 1 July 2009 marine reinsurance renewal remained consistent with the 1 January 2009 renewal, with rates increasing by 5 to 10% for XOL programs, based on loss history and catastrophe exposure.
• Capacity was limited for offshore energy programmes, for Gulf of Mexico windstorm in particular. As pricing and attachment levels increased, terms and conditions also tightened. A number of insureds chose to self-insure Gulf of Mexico assets, leading to a dramatic drop in aggregate risk limits.

Links

• Aon Benfield
• Guy Carpenter
• Willis

There is a new toy in the ILS toyshop.

As the ILS market has rapidly expanded over the past decade, a number of, predominantly European, (re)insurers acting under the auspices of the Chief Risk Officers’ Forum have been investigating the development of a bespoke European loss index. Yesterday Perils AG was announced. Perils’ founding shareholders, who hold equal shares in the firm, include Allianz, AXA, Groupama, Guy Carpenter, Munich Re, PartnerRe, Swiss Re, and Zurich. The company will be fully operational in the latter part of this year, and will offer two main products ‘to subscribers’, which are likely to include insurers, reinsurers, brokers, risk modellers, banks and other insurance industry stakeholders.

These two products are:

1. Aggregated industry-wide insurance exposure data (insured values), which will be catalogued by risk type and CRESTA zones (defined European geographical zones for natural catastrophe insurance). The data will be provided on an annual basis;

2. Industry loss estimates per risk type and CRESTA zones, following large natural catastrophe events.”

The development of this index will remove any perceived ‘moral hazard’ from Swiss Re. Swiss Re have been actively engaged in the ILS space, facilitating trades, buying/selling ILWs, and so forth. By removing the reliance upon a Sigma trigger will ease the reporting burden on Swiss Re, and increase the transparency around the index itself.

 This initiative is to be welcomed and will have some beneficial impacts upon the European insurance industry. But will it be industry-changing? The timing of the release of this product, given the current economic backdrop, will make it challenging for ILS providers to test the water with this index—as this has not been tested in a real cat scenario.

There are associated issues of basis risk given that the index will be based upon a large set of extrapolated exposure/inventory and loss date. The quality will be driven by the information provided by respondents to the questionnaire issued by Perils. The big question remains as to how forthcoming, and timely, this information will be. Improving data quality and maintaining the integrity of the underlying databases will be a significant challenge, and an ongoing issue – as the catastrophe modelling agencies have already found.

I look forward to seeing how this index develops, how widely it will be used (given that this is on a subscription basis rather than ‘free’), and whether it will indeed help to revive the ILS space in Europe this year.

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.

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.

Today, it is an intense four day whirl of meetings, press conferences and cocktail parties that attract senior reinsurance industry executives from all over the world.

In 2001, afternoon meetings were in full swing on 11 September when news began to filter through of catastrophe in Manhattan. For once a hush fell over the Rendez-vous as executives tried to comprehend what was happening in the Twin Towers. Many of those present had friends and colleagues in the buildings.

There is usually plenty to talk about. Often it is hurricanes. In 2005, Hurricane Katrina had just completed its devastating tour of the Gulf coast, and the extent of the flooding in New Orleans was just becoming clear as reinsurance people poured into Monte Carlo to discuss risk pricing.
Usually it is an upbeat affair. As Cannes is to the movie business, Monte Carlo is to the risk business. If you are big in reinsurance, you simply have to be there.
Why Monte Carlo? There are very few places that have so many big hotels crammed together and of the high standard demanded by CEOs, not to mention Michelin-starred restaurants. Also, it is safe. Monaco has more policemen per head than any other country, so no-one has to worry about getting mugged on the short walk between hotels.
The atmosphere during the RVS is not as charged as during the Grand Prix week – but Monte Carlo is still a mad house for the duration of the reinsurance meeting. People start to arrive on Sunday; the lucky ones by helicopter shuttled from Nice airport. Financial journalists pile into press conferences called in hotel salons across town while business people hook up for snatched conversations in hotel lobbies and café bars close to the casino in the centre.
The hub of the RVS from morning until dusk is the Place du Casino. The terrace of the Café de Paris, on one side, is mobbed by reinsurance people desperately trying to find their next meeting in the crush. Push your way through the parked Ferraris to the other side of the Place, up the steps, through the revolving doors and into the magnificent lobby of the exclusive Hotel de Paris where the air is buzzing with industry gossip.
A short walk away, the belle époque salons of the Hotel Hermitage are where more subdued, discrete meetings take place. For those who like a sea view, the vast Piano Bar of the rather more garish Fairmont-Grand Hotel is the place to find a berth.
Starting with an early morning power breakfast, people make absurd demands on their diaries and their constitution: a series of 15 minute meetings back-to-back means there’s no margin for error. Spend too long on pleasantries with that London broker and your schedule is thrown. One more coffee with that Bermuda underwriter and you’ve got caffeine poisoning.
Forewarned is forearmed: be prepared with these Rendez-vous survival tips:

• Men need to pack the smart/casual uniform of chinos and polo shirts. Women will need posh frocks for cocktails and dinner
• Bags a table early in the Café de Paris and keep it all day. But remember to top up the meter, I mean waiter
• Keep your Blackberry charged. People’s plans change and you will need something to do while you wait for no-shows
• Don’t stare at the ‘ladies’ wearing mink coats in the Hotel de Paris even though the temperature outside is 27 deg C
• Do wear a fur coat if most of your meetings are in the aptly named Sporting D’Hiver. The aircon is set at minus 10 deg C
• Pace yourself on Tuesday as the last cocktail party starts at midnight on the terrace of the Hotel Hermitage
• Good places to hide if it all gets too much include Monaco’s Old Town, the Jardin Exotique or Jacques Cousteau’s Oceanographic Museum
• If you can’t be there in person have a virtual Rendez-vous: pay to register and get your name in ‘the book’ anyway. Give your hotel as ‘residence privee’

Keep following the blog as I’ll be posting more entries from Monte Carlo itself. And Lloyd’s will be launching a new report on coastal flooding as part of their 360 thought Leadership program.