Calm after the storm

As delegates gather for next week's reinsurance renewal meetings in Baden-Baden, it seems 2008 could be the 'year of the squeeze' for direct insurers. At least that is the view of Ian Wicks, managing director of Harman Wicks and Swayne, who says: "Insurers' inwards rates are under greater pressure in almost every class, while the reinsurance rates give every sign of holding more strongly to the line. A number of conversations in Monte Carlo were to do with waiting for the other party to blink first."

Mr Wicks says it does not look like shortage of capacity will be an issue unless reductions in prices lead to withdrawal of major markets - a situation that he suggests is unlikely. Prior to the last year-end, a shortage of capacity was anticipated but, ultimately, there was sufficient. Even the state catastrophe fund expansion in Florida has not affected things that much, since the money saved at the lower end of programmes has often been spent buying more top-end coverage.

Managing the price cycle

Despite the available capacity, Philippe Rochaix, general manager of XL Re Europe, says that reinsurers have been able to maintain a strong underwriting discipline. "We have to recognise there is a price cycle but the swing is not as great as in the past. XL Re, along with many other companies, is very proactive in managing the cycle." XL Re will also be running its established symposium on Sunday afternoon with this year's topics ranging from the capital markets' intervention into the reinsurance sector, to the focus of security rating agencies on enterprise risk management and the European Commission's current inquiry into the insurance and reinsurance sector. The symposium has already attracted a record number of registrations from delegates keen to debate these topical issues before the week's meetings start in earnest.

Asked whether capital markets are simply an opportunistic intervention or a long-term solution to variations in capacity in the traditional reinsurance market, Seymour Matthews, managing director of Heath Lambert's reinsurance division, responds: "Capital markets work well with traditional reinsurance, particularly from a client and broker viewpoint. They will gear up in a time of more limited capacity, with typically higher prices and ease down when the traditional markets become more competitive. However, while they are opportunistic I believe they are also long term."

Arguably, the effect of this year's floods in Australia and the UK could be a main topic of conversation, although Mr Wicks says: "These have not been as big a reinsurance issue as they have been for the direct insurers. Flood losses may have hit the lower layers of some excess of loss programmes but haven't done too much damage." Yet he does believe that one of the discussion points for this renewal will be how best to deal with flood as a peril, and there have already been discussions on draft clauses to try to bring greater certainty to the coverage. Mr Matthews adds: "Some of the companies with flood losses may not buy coverage at such low levels again, but UK companies that were hit twice may be looking to buy more sideways coverage."

Meanwhile Chris O'Kane, chief executive officer of Aspen Insurance Holdings, points to the unpredictability of flood claims as revealed by the fact that some companies have faced quite small losses while others have suffered surprisingly large ones. He maintains a distinction needs to be drawn between river flood as opposed to coastal inundation. "River flooding has a different kind of cause and is a different kind of problem and, as this summer proved, can be quite costly. One of the areas for discussion starting now - and probably set to run for the next couple of years - is to get better data on flood losses, investigating new software and the use of new technology." Mr O'Kane believes quality of data is another issue that deserves attention - especially as to how well it is put together and transmitted through the various channels until it arrives at the ultimate reinsurer.

Inevitably the price for next year's coverage is high on the agenda. "In our view there will be some price slippage but not as much as some are talking about," comments Mr Wicks. "A likely outcome is that buyer and seller alike will be equally disappointed. As always we will direct our efforts to ensuring our clients are treated fairly and that the market makes the necessary distinctions in the rating and coverage offered. 'One size fits all' is not the way that we, as brokers, think about the business."

A softened market

Mr Matthews also thinks there may be a softening in some areas of the market, making it possible to place certain classes of business that were not placeable before as reinsurers diversify. In addition, wider coverage may be available. "Overall the reinsurance prices for short-tail classes will decrease, although there will be exceptions - typically those clients with losses or ones who have opportunistically gone into more exposed areas," he says. But Mr Matthews also believes some interesting circumstances could still affect the liability and longer-tail accident classes, and so much more will depend on the individual client's exposures, making this sector potentially more stable. "We are in a supply and demand business. Therefore, like most others, our products are inclined to move with the increasing or decreasing appetite for the risks. We are in the cycle of some very profitable years, so the markets are softening. But regardless of hard or soft markets, brokers will always look to be competitive."

Mr Wicks says the broker's key challenge will be managing the expectations of both clients and markets, and there will be several visits to the leading markets before orders are given. "This renewal season will probably be the usual story - start early and finish late. But, early or late, it is likely to be long and slow as the conflicting demands of the client and the market agree a level that they can live with." Mr Matthews agrees, adding: "I have yet to be part of a seriously early renewal season and this is not likely to be the first."