The Monte Carlo theory

While the words ‘Monte Carlo’ might conjure up thoughts of the high life and trying your luck at the world-famous casino, it is unlikely to be all fun and games for the insurers, brokers and reinsurers that attend the annual event this year.

Of course, there will be lavish cocktail parties and expensive dinners aplenty: Les Rendez-Vous de Septembre has always been more about networking and relationship-building than signing on the dotted line. The event takes place in the middle of the North Atlantic hurricane season, making it difficult to seal any firm deals – a fact that has caused many critics over the years to dismiss the Rendez-Vous as a mere jolly.

In fact, it is the first chance in the run-up to the 1 January renewals for buyers and sellers of reinsurance to size one another up and get a feel for what might be available at what price before more detailed discussions take place at later events, such as the Baden-Baden meeting in Germany in late October.

The early indications are that negotiations will be tough, even though first-half catastrophes have barely scratched reinsurers’ capital bases, which may prompt some to expect ample capacity at low prices.

A big sticking point is likely to be the diverging fortunes of the insurance and reinsurance industries. Reinsurance rates are generally softening. However, primary prices are falling faster which, coupled with the lingering effects of the financial crisis, is diminishing cedants’ spending power. “Increasing competition among the industry’s clients – the primary insurers – leads to a much more competitive environment in the reinsurance market overall,” says Bermuda-based (re)insurance group Endurance Specialty Holdings’ president, William Jewett.

“Many of our clients are seeing their top and bottom lines compressed, driving them to look for cost savings, and negotiate their reinsurance programmes more strenuously,” Jewett adds. “We expect a focus at the 1 January renewals on negotiating the best terms and managing capital in the most efficient way possible.”

As a result of their challenging situation, reinsurance buyers’ cries for price cuts are likely to get louder. “There certainly will be pressures from buyers on their reinsurers to give them discounts and price breaks,” says Brit reinsurance division’s chief executive, Jonathan Turner. “The primary insurance market is, almost globally, facing challenging times because rates have fallen so much and there are no real signs of those markets getting any better. The first thing they look at in terms of their outgoing costs is their reinsurance spend.”

Challenges ahead

The clamour for cheaper rates is going to be difficult for reinsurers to ignore, especially because they are coming from often long-term customers.

“Negotiations can be challenging in any market conditions but, given the pressure of the soft market, clients are looking more closely at their expenditures and are faced with difficult decisions,” Jewett says. “It will be a test of reinsurers’ discipline as well as the relationships people have formed, in some cases over years or decades, as to whether they can agree on a mutually beneficial price.”

Reinsurers, cognisant that pricing adequacy in their own business is declining, will be reluctant to give much ground. Turner points out that while reinsurers have weathered the heavy first-half losses, which include the Chilean earthquake, Australian and European storms, the Deepwater Horizon oil rig explosion and attritional losses in places such as the US Midwest, these have taken their toll. There are also further challenges to consider, such as how greater inflation could affect long-tail claims, and the lack of decent investment returns thanks to persistently low interest rates.

“When you add all those things together, the rosy picture that brokers seem to want to paint of the reinsurance world actually has a pretty cloudy horizon,” Turner says. “As a consequence, there is no reason why reinsurers would want to drop rates. The need for underwriting discipline is there and I don’t see that changing.”

Despite their resilience and good levels of capitalisation, the challenges facing reinsurers in the current market have not gone unnoticed. In its 2010-11 Global Reinsurance Review and Outlook, published on 31 August, rating agency Fitch noted that reinsurers’ earnings were under pressure as a result of depressed investment returns, softening rates and lower reserve releases from old underwriting years.

“Underwriting discipline is the only lever left for reinsurance management to maintain profitability,” says Fitch managing director of insurance Chris Waterman.

While cedants may accept their reinsurers’ need for maintaining price discipline, they are unlikely to be forgiving of across-the-board changes. “We are gross-line underwriters, we use reinsurance as a second line of defence, and we don’t dollar swap with our reinsurers. We definitely want people to set us apart from the crowd and understand our risk appetite, rather than treat us like just another cedant,” says Barbican commercial deputy underwriter Conor Finn.

He acknowledges, however, that insurers need to make an effort if they are to get the personal touch from their reinsurers. “The onus is firmly on us to differentiate ourselves,” he says. “It’s no good blaming the reinsurer for not understanding us.”

In this regard, at least, reinsurers may be willing to give some concessions. “Clients who go to their reinsurance markets with a consistent message, a good track record, good data and no surprises will be welcomed with open arms,” Turner says. “Clients like that will invariably get more competitively priced deals.”

Talk time

While pricing, terms and conditions will always take centre stage at Monte Carlo, there will be plenty of other issues that insurers, reinsurers and brokers will want each others’ opinion on. One looming issue that has been occupying many senior managers’ time is the European Commission’s Solvency II capital regime, which is scheduled to come into force at the beginning of 2013. The market is currently engaged in the fifth Solvency II quantitative impact study, and so the market is still trying to determine the impact on capital requirements.

Reinsurers in particular are hopeful that the new solvency requirements will create a greater need for reinsurance as a form of capital. “We have had a number of conversations recently with reinsurers who are keen to provide solutions for capital issues arising from Solvency II,” says Martin Davies, who is responsible for capital-related reinsurance transactions in the brokerage division of Towers Watson. “There is certainly a willingness to provide transactions that are capital and solvency efficient.”

However, he adds: “The hurdle to more transactions being done is that no one knows exactly what their capital requirement will be.”

Financial strength ratings are a regular theme at Monte Carlo, especially when a prominent reinsurer is downgraded just before the event, as has happened a number of times. Few will forget SCOR’s downgrade to the triple-B range in July 2003, for example.

Ratings are likely to become particularly relevant in light of discussions about Solvency II because insurers are likely to be given greater credit for reinsurance from providers with higher ratings. Some reinsurers, notably Swiss Re, are aiming for stronger ratings. “There is a pretty strong desire from the single-A rated community to see whether they can get back to double-A land,” says PricewaterhouseCoopers partner, insurance, Achim Bauer.

If rates, capital regimes and financial strength are not enough for Monte Carlo attendees to get their teeth into, there is always an event or announcement before or during the event that defines the gathering’s theme. This can be downgrades, merger rumours, closures or the prospects for start-ups. Two years ago, for example, the Aon/Benfield merger was the talk of the town after it emerged in late August that a deal was on the cards. Last year, counterparty credit risk was much discussed following the onset of the financial crisis the year before. This year, the decision by Glacier Re to close its doors to new business could set some chins wagging.

Major catastrophes are also often a big talking point at Monte Carlo, given the event’s position during the hurricane season. Many a Rendez-Vous has been defined or indeed interrupted by a large event.

While it is difficult to predict Monte Carlo’s central theme for 2010, one thing is certain: cedants, reinsurers and brokers will not have to endure any awkward silences over dinner or cocktails at this year’s event. IT