Up for discussion

Price and security are the key issues for this renewal period. Perhaps that is no different from any other season that has gone before, except that this year, these issues seem to have acquired a far higher profile.

Whether it is price first and security second, or the other way around, they will both be essential components of the reinsurance renewal discussions next week in Baden Baden, Germany.

As usual, the town will play host to around 1500 personalities from the insurance and reinsurance world gathering there for the traditional series of meetings to consider their own individual business relationships. As a sign of the importance this event has achieved, the delegates are this year receiving a welcome from the Lord Mayor of Baden Baden Dr Sigrun Lang.

Burning topic

High on the agenda, will be the burning topic of reinsurer security, stoked up by the rating agencies, which have almost universally downgraded the sector - to the annoyance of some reinsurers, which complain it is unjustified. But the downgrades have certainly made it a very difficult task for insurers to select the right reinsurers for stability and continuity.

The two key issues of price and security are inextricably linked and the perils of feeding under-rated business to your reinsurer are much better understood these days, for even the strongest reinsurer is bound to wilt eventually in such circumstances. Clearly, such practices are a pastime that should now be consigned to the past. With any prospect of investment returns to cushion the blow now, obviously, a very distant possibility, the need for technical underwriting profits is greater than ever.

While there have been some murmurings that rates might be reducing it seems reinsurers are in no mood for weakness and are expecting that a strong stance will be sufficient to curb any softening tendencies. One major London reinsurance underwriter has said he is now encouraged to believe that the market will hold up better than might have been feared even only a few months ago. He suggests that the need of major reinsurers to charge adequate premiums will keep the emphasis on improving rates in an upward direction. In addition, his opinion is that business in several Continental European countries is still not wildly attractive and needs to get better in a lot of cases, so it is not realistic to expect any downward movement.

Philippe Sloan, external relations manager of GE Frankona Re, says: "So far as our group is concerned, we believe talk of declining rates is premature.

The market has had only a couple of years of hardening rates and tighter conditions, which are not sufficient to repair the damage of recent years.

Our aim at corporate level is to ensure we re-build our security agency rating back up to our desired level. And, in order to do that, we need to continue to focus on good technical underwriting. Like everybody else, we have our return on equity parameters to work with and, ultimately, we are prepared to lose business if it does not match up to our requirements."

Lloyd's underwriter Russell Merrett of Hiscox Syndicate 33 also thinks it unlikely rates will reduce. "I am feeling more comfortable that any softening tendencies are going to be arrested by the fact that the world's major reinsurers have problems to deal with and there will be enormous resistance to any suggestion of reducing rates." However, he thinks that inevitably the renewal discussions next week in Germany will involve some tough talking around the issue of price.

It seems unlikely that many reinsurance deals for next year will be finalised at Baden Baden. Instead, like last year, it will again be just one more step in the negotiation process. That suggests that final decisions will only begin to be made in December as has increasingly been the case over recent years. Mr Merrett sees that situation happening again this year.

"It helps no one particularly and it makes for a tough December," he says.

"But we are geared up to give a 24-hour turnround on quotations, although sometimes it is a bit tricky if they all come in within the same 24 hours."

A positive sign

However, Mr Sloan adds that quite a few brokers have produced the information required for renewal earlier than usual and GE Frankona Re's underwriters have encouraged them to initiate early discussions, which he sees as a positive sign. "We are ready to carry out all the modelling work that needs to be done, whatever the line of business," he says.

"Of course it is difficult to gauge what the reaction will be to the terms we put up and, therefore, what the timescales might be. It depends upon the expectations of the reinsurance buyers - particularly if they have an expectation that they can achieve savings. It is hard to know until we get the reaction from the first ones we quote as to what the general expectation is," says Mr Sloan, concluding: "The message we are giving is that we are ready to quote, but the rating will always be relevant to the risk and exposure."