Reinsurers are set to meet with brokers and cedants next week in Baden-Baden, the German city famous for its spa, to discuss renewal terms, and the main subject is likely to be premium increases.
The industry is now more than ever committed to producing satisfactory underwriting results. That means they are increasingly reluctant to underprice coverage, even for their biggest clients. Preliminary indications at the Reinsurance Rendezvous in Monte Carlo in September indicated that the companies were nearly unanimous in recognizing the necessity of reducing combined ratios, and pricing coverage on a realistic basis, grounded in loss experience and increasingly through the use of analytical models.
The steep fall in equity values, coupled with reduced returns on investments, has meant that reinsurers can no longer rely on that option to produce profits. The industry has been weakened by a combination of increasing loss reserves, following Sept. 11 and other natural disasters, at a time when global share markets are depressed. As a result several of the largest reinsurers have seen their ratings downgraded, including Swiss Re, the second largest, which recently lost its coveted triple-‘A’ rating from Standard & Poor’s.
There’s some question as to capacity. While Swiss Re recently indicated that its studies show that as much as $180 billion has left the market since 2000, more than $30 million in new capital has flowed into it. Paul Walther, the head of Reinsurance Directions in Heathrow, Florida. recently returned from a conference of reinsurers and brokers in Bermuda, said that the people he met with, were calling current conditions a “crème brûlée” market. “Once you crack through the surface, you can do anything.”
The “surface,” he indicated, is the “perceived adequate price.” Walther explained that “once the price [for coverage] is set and the terms have been established and finalized, there’s no problem for the cedants in placing their program.” While rates have climbed sharply, in many instances between 50 and 60 percent, once that threshold is reached, most reinsurers are accepting the risks. “If the rating level is adequate, and the lead [reinsurer] signs on, the rest of the players have no problem in taking up the cover.”
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