Testing times

Eric Alexander previews the Baden-Baden meeting to be held on 25 and 26 October, at which the impact of typhoons and hurricanes on reinsurance costs and renewals will be one of the burning issues

This September's hurricanes shattered whatever expectations there might have been earlier in the year for reductions in the cost of reinsurance programmes for 2005. Just how much the losses have impacted various accounts and the consequences on reinsurance pricing will be one of the hot topics for discussion at next week's reinsurance meetings in Baden-Baden, Germany.

Andrew Carrier, active underwriter at Kiln Re, says that after a couple of benign years in 2002 and 2003 this year's hurricane activity was a wake-up call to the market, which had been drifting into a softening mode.

He comments: "Perhaps this activity in the third quarter should not be seen as too much of a surprise. What is worth noting is the unusual track the hurricanes took, with four or five Caribbean islands being hit and Hurricane Ivan doubling back over Florida." He adds: "Reinsurers' earnings in the third quarter will be dramatically affected."

Blowing in the wind

Gerald Konig, European origination leader at GE Insurance Solutions, believes that these four hurricanes, together with recent typhoons in Japan, have had an obvious impact on the world market. He says: "If we add up all the losses, we expect that 2004 will be one of the most expensive years ever for insured losses arising from natural catastrophes. The total will at least reach the cost of Hurricane Andrew (in 1992) but could even exceed it."

He continues: "While it is still too early to give a firm figure on losses, I think this will be a peal catastrophe year. We're expecting a stable market environment on the property catastrophe lines as a result."

Reinsurance broker Dermot Flood of Cooper Gay, adds: "These losses are certainly going to impact the earnings of most reinsurance companies in 2004. It is not really a capital issue so I cannot see any major withdrawals from the market; however, people will want to get those earnings back on track for next year and I think reinsurers will be looking to maintain rates in the market."

Mr Flood's colleague, Frank Rieder of Cooper Gay USA, points out that there is also a psychological factor arising from this year's hurricane pattern. He says: "It is not purely the size of loss for each individual event that is notable but more the psychological impact in that they were so close together, almost back-to-back, and taking paths that were very similar. Due to the way that reinsurance is currently structured, companies did not necessarily experience the recovery on the reinsurance side that a lot of people were hoping for because retentions have been going up over the past few years."

Loss frequency

Mr Rieder adds that the frequency of losses had a significant impact, especially on those who had opted for higher retentions. He suggests that while two losses within the retention was probably acceptable, when it gets to three or four it could start to sting. He says: "I think that is what has happened. Many people are looking at their retentions and claiming never to have thought they would have experienced this sort of frequency within what was basically a four-week period."

Whether such frequency might make various companies rethink their retention and perhaps seek to decrease it is always a possibility. It seems inevitable that people will more than ever be reviewing their reinsurance requirements but price is always going to be a major factor and lowering the retention could prove costly.

Peter Middleton, managing director of Markel International's specialty division, believes the effects of these hurricanes will move attitudes in the market primarily based on their frequency and not necessarily on their size. Many firms have been hit hard within their retentions and there have been significant increases in retentions in recent years as a consequence of the price of reinsurance going up.

"I suspect the only people who are now going to be coming to the table for 1 January renewals looking for rate reductions, in terms of property catastrophe cover, are those in territories not subject to these types of loss," adds Mr Middleton. "However, even if they come for softening, they might not necessarily get it because most reinsurers will be saying it is a global market for catastrophe business and you have to contribute to the common pot. So the market will be firm with people who experience any sort of loss paying higher prices."

Security issues

Another important topic that inevitably features in Baden-Baden discussions is that of security. This is frequently driven by the experiences of previous years. Two years ago, Gerling was in the spotlight, last year Scor, and this year it is Converium. There are ongoing discussions about the security of reinsurers and there is always action that has to be taken arising out of these developments.

Mr Konig says: "This is a critical issue for our industry, in which we need stable and financially strong players. The importance placed on security confirms and supports the restructuring we have done in GE Insurance Solutions over the past couple of years. We really did everything that was needed to put our company into a financially stronger position."

He continues: "If you look at how we are measured nowadays, how the rating agencies look at reinsurers, then we have to have a certain equity capital requirement on which we obviously need to earn a return. The better the security, the higher the capital we use. It is also why a higher margin is required, to pay for this capital."

Clearly, there will be tough talking in Baden-Baden next week with much to occupy the minds of the 1500 or so insurer, reinsurer and broker delegates attending. To what extent they will return home with definitive contracts fixed is another matter. All in all, the renewal season looks like it will be another testing one.

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