Standing appointments: the path of reinsurance renewals still leads through Monte Carlo and Baden-Baden, but consolidation and technology are changing the scenery.

Key Points

* The 2005 reinsurance renewal season found rates flatter than might have been expected, given the high level of catastrophes and other losses seen during 2004.

* Reinsurance buyers are making increasing use of technology to plan strategy and centralize their purchasing.

* The October Baden-Baden conference is growing, with an increasing representation by both brokers and Lloyd's underwriters.

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The annual reinsurance renewal season can be a fraught time, involving the competing goals and fine judgments of insurers, brokers and reinsurers. In Europe, the process has two public milestones: the Rendez-Vous de Septembre in Monte Carlo and the reinsurance meetings during the following month in the German resort of Baden-Baden.

Monte Carlo is seen widely as a heavily social occasion, where chief executives stroll ancient streets, making informal contact. Negotiations will have assumed a more definable shape by the opening of Baden-Baden, where the emphasis is on getting the wordings right and moving closer to agreement. In the United States, reinsurance renewals were a major topic of discussion at the October annual meeting of the Property Casualty Insurers Association of America.

The underwriting director of a Lloyd's insurer drew a parallel between the two European meetings: "Some people have got more of an emphasis on Monte Carlo and less on Baden-Baden," he said. "But I think Monte Carlo is regarded as being more sort of social--meeting, greeting, getting-to-know-your-reinsurers, chairman-to-chairman-type discussions. Baden-Baden is a lot more 'working.'"

This article is based on interviews with several London-based insurance executives who do business through Lloyd's.

The underwriting director said that there were "probably no real surprises" from Monte Carlo this year. "When we were at Monte Carlo," he said, "the expectations were that the European rates were going to continue to come under pressure, and, in effect, that's what happened."

The extreme weather that occurred during the second half of 2004 didn't send catastrophe rates upward. The current flatness, noted an underwriter for a Lloyd's managing agency, has confounded some expectations. "Everyone is talking about how the reinsurance market is going to harden because of this," he said. I have not seen that much evidence [of that]."

Advance Preparation

The renewals process involves more than meetings in famous resorts.

Market participants prepare their renewal agendas and strategies well in advance, making increased use of technology to maximize their competitiveness.

The underwriting director said that his group's approach to the reinsurance market is based on a plan that is updated on a monthly basis according to continuing assessments of key trends. "As part of the 2005 business planning process," he said, "we would have looked back to what we had been achieving in 2004."

In June, he said, division heads consult with their class underwriters and come back with their expected business plans for the following year. This data will help shape the overall approach to the market. One topic of internal debate may, for instance, involve the best response to projected changes in premium levels within a certain class of business. "I would be providing the capital to support the plan," the underwriting director said. "Therefore I have to buy into the plan in its entirety."

The chief executive of a London-based Lloyd's underwriter finds both Monte Carlo and Baden-Baden useful for maintaining contacts and sending out messages to the industry on important issues. This executive also noted that the conferences support his group's dual role as a buyer and a seller of reinsurance. "We go there wearing both hats," he said.

But Monte Carlo, the chief executive said, is far more important for the team that sells reinsurance than it is for the group as a whole. He said that these specialists go to the Riviera with a clear idea of whom they want to see and why.

The chief executive said that his group does its direct reinsurance buying in what he describes as the very different atmosphere of Baden-Baden. "There are a lot of similar people," he said, "but there is a different emphasis to a large degree." Despite the value of the conferences in communicating with the industry, he said, "they are no substitute for meeting with your clients or your reinsurers on a one-to-one basis in their offices. And all our underwriters travel extensively."

The underwriting director said his group has a presence at Monte Carlo through its European office. A bigger team goes from London to Baden-Baden, which, he said, has seen a large increase in attendance in recent years. He said the turnout has been augmented with a greater representation of brokers. "That is for us an important conference where we do talk directly with reinsurers and agree things" he said of Baden-Baden.

Baden-Baden, the underwriting director said, provides what is probably the first chance for an underwriter to put its ideas across to the principal, particularly proportional, reinsurers and to get a sense of what they are expecting.

A deputy of the underwriting director said Baden-Baden has become more global in recent years. "Originally it was far more European-biased," he said. "But there is quite a lot of attendance now from Japan, a lot of Americans going, a number of reinsurers outside of Europe."

Baden-Baden, he said, also has seen increased representation from within the Lloyd's market. Five or six years ago, he said there were probably only three or four managing agents at Baden-Baden. Now, he said, there may be as many as nine.

Technology Takes Hold

Some emerging trends in the reinsurance market would appear to favor the buyers over the sellers. The growth in the size and reach of underwriters has made it easier for them to buy reinsurance on a group level, absorbing more losses in-house. And the increased sophistication of technology has given the insurers more confidence about retaining higher levels of risk. "We have centralized the purchasing of reinsurance," the chief executive said.

The managing agency underwriter agreed that the insurer's ability to obtain better data helps the underwriter pinpoint its exposures. A decade ago, he said, reinsurance customers had so much difficulty identifying their exposures that many "were buying layers which they didn't need to buy simply because they were worried about the potential out there." One result of the greater confidence of the underwriters, he suggested, has been the obvious pressure on catastrophe reinsurers to write business on more of an extreme-events basis. "They're not getting a share of the more regular, lower-level business where you can build a portfolio," he said of the reinsurers.

The chief executive said that individual underwriters within his group make their own recommendations as to what level of reinsurance cover to buy. But the final decision is made by a committee that can bring a broad view of the group's portfolio. He said the group's balance sheet strength means that it doesn't have to use reinsurance as a form of gearing. "Reinsurance effectively does two things," he said. "It is either a capital substitute or it reduces earnings volatility. And on the whole we do not buy reinsurance as a capital substitute."

But reinsurance, the chief executive said, is useful in reducing the volatility of potential earnings. He said that, while a large hit wouldn't affect the group's capital position, it could have an impact on earnings tot that year. All this implies that a certain attention to detail is needed to run the kind of diverse portfolio that can balance risk. Aggregates, for instance, must be closely monitored on a group level. "We don't let ourselves get overexposed to any one event or any one series of events," the chief executive said. "That's what protects the capital."

The effective use of technology is central to this process. An underwriter, for instance, now is likely to use a modeling tool that will gauge the efficiency of its reinsurance buying. Such a system will also track other risks, such as investment, liquidity, counterparty and operational. The lesson is that a large company that can use this kind of analysis to buttress its own market muscle will, over time, be able to retain more risk and lower its costs. Over three years, the chief executive's group achieved a 50% cut in its reinsurance spending. "We were wasting a lot of money buying a lot of risk excess that we didn't need," he said, "because no one was able to look at it from a holistic point of view."

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Close analysis can be particularly useful ill guiding decisions about counterparty risk. It will, for instance, help the buyer consider the relationship between ratings and size. If the buyer decides that it is overweight with a reinsurer, the chief executive said, it can reduce its exposure by buying credit derivatives. Being underweight with a reinsurer may point the underwriter toward a campaign to strengthen its relationship with the carrier. This strategy, the chief executive said, might involve a 12- to 18-month program of rapport-building and mutual visits. "You can't," he said, "just turn tip on the first of January or the first of April or the first of July and say 'Here's our program; will you write it?'"

A Year-Long Endeavor

The chief executive said his group has spread its catastrophe reinsurance purchases over the entire year. He said it now buys as much at March 1 as it does at Jan. 1. He noted that Jan. 1, the traditional date for reinsurance buying in the London market, can involve an overhang from the previous year. "The problem with that," he said, "is that you are a bit looking over the edge of a precipice."

The chief executive is able to see the reinsurance market from two perspectives. He takes a wry view of this. "As a buyer," he said, "I think we pay a little too much. And as a seller, we're not getting the price that we require."

In putting their plans together, Lloyd's underwriters must consider the views of Lloyd's in such areas as coverage, deductibles and insurance costs. Lloyd's has become increasingly explicit in recent years about the standards it expects to see from organizations that trade under its roof. Insurers will be expected, lot instance, to offer their likely responses to hypothetical events. The underwriting director said his group's plan is sent to Lloyd's in September. "Internally we agree our plan," he said. "And we then have to go and broke it to Lloyd's."

The managing agency underwriter complained about what he regards as Lloyd's onerous requirements on reinsurance cover. Lloyd's, he said, wants its insurers to have reinsurance in place that would cover extreme, rather than more likely, claims. "It's almost a tax," he said. "You have to buy more reinsurance than you would normally buy."

Apart from what Lloyd's may be looking for, underwriters also must keep a summertime eve on the Caribbean. "The plan becomes slightly fluid even between June and September," the underwriting director said, "because hurricane activity would hazy changed our opinion during that time on the circumstances as we saw them from [Jan. 1]."

The chief executive sees problems for brokers in the ability of insurers to retain more risk and add efficiencies. He said the centralized purchase of reinsurance is likely to reduce the amount of cover sold and increase the overcapacity that appears to have set in within the reinsurance broking sector. The brokers that are likely to survive, he said, are those that can provide analysis to inform their clients' buying decisions. "I think they've got to get much closer to their clients," he said, "understand their balance sheet, their earnings, what's driving the whole financials of the group to be able to add this sort of value that will be required going forward."

A big insurer, the chief executive suggested, doesn't need brokers to provide introductions to reinsurers. "There are probably only 60 reinsurers out there in the world," he said. "We know them all. We have analyzed all their balance sheets. We know who they are. A lot of them are our clients anyway."

But the chief executive, who describes his organization as committed to the broker model, believes in the value of having a third party in on negotiations. "A good broker is able to close deals that wouldn't have been closed if the two parties had been talking necessarily directly," he said.

The chief executive noted that buying decisions are influenced by supply and demand within a particular class of business. He said there is, for instance, a shortage of capacity in casualty treaty business and ample capacity in U.S. property treaty. "I don't see it as a balance of power between the insurer and the reinsurer," he said. "It should be a relationship. It should be about helping each other's business."

The decline in the number of reinsurers over the past two decades cannot but have taken some of the edge from the big industry conferences. "If you have 400 reinsurers," the chief executive said, "these things will have more of a benefit than if you've got 60."

He noted that an insurer that has strong relationships with 30 reinsurers would easily be able to visit all of them over the course of a year. He said these big meetings were more helpful in the days of smaller buyers and smaller sellers, where a single program might have had 20 or 30 reinsurers.

The two European conferences can convey the state of the industry in subtle, and dramatic, ways. The terrorist attacks on the United States in September 2001 are doubly etched on the memories of insurance and reinsurance people. Not only were they unprecedented, but they occurred while the Rendez-Vous was taking place. "Everybody, quite understandably, went into a total state of shock," the chief executive said. But the earliness of Monte Carlo can mean that it fails to provide a full sense of what may be brewing. In 2004, the chief executive said, three hurricanes and major earthquake and typhoon activity occurred after Monte Carlo.

Top 10 Global Reinsurance Groups
Ranked by consolidated gross premium written in 2003.
(US$ Millions)

   2004                                   Prior Rankings

Ranking   Group Name               2003      2002          2001

      1   Munich Re                   1         1             1
      2   Swiss Re Group              2         2             2
      3   Hannover Re                 4         5             5
      4   Berkshire
            Hathaway Group            3         3             4
      5   Lloyd's of London           5         6             6
      6   GE Global Ins Hldgs         6         4             3
      7   Scor Group                  7         8             9
      8   Everest Re Group           13        15            18
      9   XL Capital                  9        11            16
     10   Axa Re Group                8         9            17

   2004                             Consolidated         Total
                                      Premiums      Shareholder

Ranking   Group Name             Gross       Net         Funds

      1   Munich Re             $28,650   $26,739       $24,338
      2   Swiss Re Group         26,849    24,789        16,058
      3   Hannover Re            14,551    10,538         3,637
      4   Berkshire
            Hathaway Group       14,373    13,135        41,715
      5   Lloyd's of London      11,802     7,820        20,618
      6   GE Global Ins Hldgs    11,559     9,729         9,122
      7   Scor Group              4,635     4,262           993
      8   Everest Re Group        4,574     4,315         3,164
      9   XL Capital              4,485     3,866         6,997
     10   Axa Re Group            4,327     2,711         1,852

   2004                                    Ratios

Ranking   Group Name            Loss      Expense     Combined

      1   Munich Re                70.4      27.4          97.8
      2   Swiss Re Group           72.6      29.3         101.9
      3   Hannover Re              86.3      15.3         101.6
      4   Berkshire
            Hathaway Group         64.6      18.6          83.1
      5   Lloyd's of London         N/A       N/A           N/A
      6   GE Global Ins Hldgs      78.5      29.9         108.4
      7   Scor Group               97.3      25.6         123.0
      8   Everest Re Group         69.6      25.5          95.1
      9   XL Capital               86.3      30.0         116.3
     10   Axa Re Group             62.7      32.5          95.2

Source: Best's Statement File-Global

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French Accent

To the world, Monte Carlo, although part of the principality of Monaco, remains an indelible symbol of la belle patrie--France. Its blue skies, bluer seas and famous casino still attract the very rich and the not so rich, who arrive by cruise ships and private jets to relax and to gawk.

The Rendez-Vous de Septembre, which helps define the reinsurance renewal season, remains popular among leaders of the industry, not least because of its Gallic ambience.

French issues, of natural interest at Monte Carlo, have taken on a higher profile in recent years. The well-publicized problems of Scor had raised concerns about whether the French reinsurer would be able to survive as an independent entity. Scor's survival through difficult times, it has been noted, has been made easier by the support of French insurers.

The French insurance market also has become more Europeanized as a result of cross-border consolidation. The adoption of the euro, the single European currency, in a number of European Union countries has encouraged the emergence of very large insurers. The German insurer Allianz, for instance, is an important presence in France through its ownership of French insurer AGF.