Lloyd’s Analyzes Baden-Baden Reinsurance Renewal Conclave

November 4, 2011

An article on the Lloyd’s website takes a look at the “insurance and reinsurance specialists,” who “converge in Baden-Baden to begin their ‘renewal season’ discussions in earnest and in preparation for January 1, when deals between primary insurers and their reinsurers come to fruition.”

At the end of October the German town on the edge of the Black Forest plays host to “soberly dressed business people, moving between crowded hotel salons and meeting rooms where intense negotiations take place over the terms, conditions and prices of next year’s reinsurance deals,” said Lloyd’s. “From the immense market noise generated, everyone is trying to discern which way pricing is going and what are the factors that will influence it on a company to company basis.”

Lloyd’s notes that “reinsurance broker Guy Carpenter usually serves as a business barometer.” In a recent presentation Guy Carp’s “Chris Klein set the scene, describing a reinsurance market that was standing up to unprecedented catastrophe losses in the first half of the year, particularly from the earthquakes in Japan and New Zealand – as well as continuing uncertainty in the capital markets, a flat economy and sustained low interest rates suppressing investment returns.

“Following speakers, which included Allianz board member Clement Booth and investment analyst Chris Hitchings of KBW, echoed that; despite the difficult environment the reinsurance industry was not sufficiently stressed for rates to rise across the board.” Booth noted that “pricing is still soft. There are as many competitive reinsurers in the game as there are those who are sticking to technical rates.”

Lloyd’s Performance Management Director Tom Bolt outlined a graphic description of the dangers facing all companies. He pointed out that the “industry traditionally provided cover against the ‘four horsemen of the apocalypse’ – pestilence, war, famine and death. Now the industry is confronted by new challenges.”

Bolt also indicated that he believes low interest rates, tough economic conditions, the prospect of inflationary pressure and the uncertainty created by new European solvency regulations have combined to make this the most challenging time for the industry he’s witnessed since starting in 1985.

He did add that prices have increased a little in some pockets of business in response. “But the challenge to make money on underwriting activities has never been higher,” he warned.

Bolt said that Lloyd’s would work hard to protect its franchise and that the performance management directorate would continue to be vigilant in its monitoring of underwriting standards and business planning in the run-up to renewals.

Earlier this year Bolt asked energy underwriters to track their aggregate exposures as losses continue to develop from the Deepwater Horizon oil spill in the Gulf of Mexico. Now he is also warning the market that it should be aware of the possible fall-out from the financial crisis spreading deeper into professional liability classes of business.

He also pointed out that catastrophe reinsurance underwriters should be aware that the full loss picture from earthquakes earlier this year has not yet emerged.

Contingent business interruption (CBI) is another major concern, which has recently emerged as a full blown risk. Bolt warned that losses from underlying insureds or developing structural damage to infrastructure could amplify cat losses. “The industry is not under reserved – but I’m not sure that this intermediate tail of cat losses is always being included in the calculations when people are making pricing decisions on prospective business,” he concluded.

Source: Lloyd’s of London

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