“I don’t think there have been any big changes between Monte Carlo and Baden-Baden,” said James Vickers, chairman of Willis Re International. This isn’t that surprising, given that the two reinsurance meetings are only a little more than a month apart.
Southwestern Germany’s Baden-Baden, however, is smaller, more private, and doesn’t welcome the enormous supporting cast that is now one of Monte Carlo’s most prominent features. It’s a place where discussions on the reinsurance treaty renewals beginning January 1 begin in earnest. Most of the reinsurance industry’s major players are present.
The increasing interest from alternative capital providers – hedge funds, private equity funds and pension funds – is still top of the agenda. “They have re-energized the market,” Vickers said; but now “we’re seeing more focus on how to deploy that capital; some deals are being turned down.”
He views the arrival of alternative capital as “good news,” indicating that insurance linked securities (ILS) have “put pressure on the [reinsurance] market” to concentrate on organization in the face of more competition, and to adopt “more flexible structures.”
As far as future reinsurance rates are concerned, which is really what Baden-Baden is all about, Vickers sees “reductions of around five percent,” but not across the board, as it will depend on what lines of business the renewal rates are being applied to.
The official theme of the conference is “transferring risk,” which would seem to be a lot broader than simply pricing it.
Vickers does see potential growth for reinsurers, but probably not in Europe or the U.S. where there is a great deal of competition and capital is available for well- established lines of business, primarily property catastrophe – U.S. weather risks and European wind storm risks – which is also where a lot of the alternative capital has been invested.
“Traditional reinsurers can develop new and different products to maintain growth,” Vickers said. They have more experience in this field and are more aware of the emerging risks. ”The capital markets aren’t there yet,” he added.
If all the buyers want from traditional reinsurers are already available products, “there’s not much opportunity for expansion, and therefore not much growth, as the demand for the coverage is less than the capital supply available,” Vickers said. As a result “Europe isn’t appealing at current prices.”
If there’s to be any growth, it will probably have to come from emerging markets, which, Vickers said, “are somewhat encouraging, especially in Asia where [reinsurance market] penetration is increasing.”
However, so is competition in those markets. He described the different approaches taken by re/insurance buyers in many of them. Some of them are “highly competent” and “very sophisticated,” while others are “very old-fashioned.” The former presumably are more open to new products, while the latter are prone to stick with the traditional ones.
The reinsurers are for the most part slowly building their portfolios in emerging markets, and are looking to them to diversify their risks. Nonetheless, prices for reinsurance are still somewhat “squeezed.”
Vickers also warned against considering all of the reinsurance markets outside Europe and the U.S. as being the same. He cited the difference between the Japanese market – very tight with little opportunity for growth – and Singapore, where “the money is pouring in,” and reinsurers’ main concern is “what they need to do to get the right price.”
Finding the answer requires collecting the data necessary to understand the risk. While risks in the U.S., Europe and in some cases, Japan, have been extensively modeled and huge data sets have been collected, this process is still going on in other parts of the world. What they show indicates that the reinsurance industry should proceed on a case by case basis, and not generalize their offerings.
“There are different distribution models for different buyers,” Vickers explained. While multinational companies are very sophisticated and knowledgeable when it comes to buying reinsurance, others differ greatly in what they are looking for. “The multinationals’ business models are very clever,” he said; describing many of the responsible managers in the field as “more ‘marketers’ than insurers.”
Addressing the recent financial fracas in the U.S., Vickers said it “wouldn’t affect the January first renewals, as interest rates are long tail, and any adjustment in prices will take place over time.