With the financial crisis and its effects on the overall economy, the capital constraints and the atypical pricing cycle weighing heavily over the reinsurers’ “peace of mind”, the year-end reinsurance negotiations will clearly mark a change of rules. So, next, take a look ahead to the pricing trends insights and the counter-current expectations for the 2010 January renewals.

The “moderate” market widely spoken after the shy rates growth in the last renewal season made nothing but a calm scene out of the industry. Reinsurers’ discipline as well as their strong balance sheets and the lack of insolvencies in the market made it sound almost like never being in better shape so that the prices have been kept low. Though, the primary market, with financial crisis and catastrophes taking their toll and weakening the balance sheets, is pulling rates on the opposite direction.

Reinsurance is leading the cycle

During the last years of soft market, with great reinsurance capacity and profitability and also lack of major catastrophes, reinsurance buyers benefited from a sort of appealing conditions in the renewal seasons, with rates continuing to go down in all lines of business. Now, given that 2008 recorded the third biggest catastrophic losses ever – USD 200 billion – and also counting up the financial crisis and the investment write-downs it has driven further on, reinsurers seem to have a much more fortunate and privileged place at the negotiation table this year.

Given the renewal in 2010, the industry is, in our opinion, in a "strength" position, Andrew APPEL, CEO of AON Benfield, stated for XPRIMM Publications. European reinsurers have achieved excellent performance during the crisis, without any financial support from outside the industry, a proof of well adapted methods of risk management and of investment strategies of reinsurance companies.

Throughout this difficult period - from the economy point of view -, reinsurers remained alongside the cedants, most of whom are affected by the financial crisis, Byron EHRHART, CEO of AON Benfield Analytics, underlined.

So, the biggest issue the insurers are facing right now is the dislocation between the primary and reinsurance market regarding pricing evolution.

Rates in lines affected either by the catastrophe related looses or by the financial crisis, have been pulled up in order for reinsurers to strengthen their margins. On the other hand, the insurers are finding very difficult to pass this rate growth to the clients, given the economic downturn and also the growing competition for market share, which led to a drift in pricing.

For the insurance industry as a whole, something new is observable: a world of two different markets. Insurance and reinsurance companies are increasingly capable to achieve higher rates in capitalintensive fields such as cat business, offshore energy and credit, or in loss-affected lines of business like aviation and space. But rates in the “other" market, for medium-sized and personal lines segments, have not increased so far. Nat cat is especially promising, we have seen rate increases in the double-digit range, depending on individual markets,Manfred BRANDMAIER, MUNICH Re Client Manager South Europe said.

The leader of the international reinsurance market, MUNICH Re, also came out well from the crisis, managing to redefine the business model during this period. The Q2 income went up to EUR 703 million from EUR 628 million due to improved investment return and more careful underwriting. The word of order was "traditional reinsurance", and also giving away risk transfer tools related to capital markets, which have given so many headaches to SWISS Re, whose write-downs from securitization and hedging corporate bonds led to a EUR 242 million loss in the second quarter.

Pricing – on the edge of a knife

The balanced reinsurance pricing in 2009 doesn’t necessarily mean the market is stable as rates are being pulled in opposite directions by counter-current forces. So, the biggest problem the buyers will have to face is the reconciliation of their pricing with the reinsurers’ one.

You can say there are push and pull pressures on reinsurance pricing. Reinsurers may want to increase rates to ensure that they achieve the necessary margins, but with shrinking demand threatening to chase down primary rates and with buyers of insurance looking to cut costs in the current economic climate, there is pressure to keep prices down. Certainly, from our point of view we will not follow such negative developments, Manfred BRANDMAIER states.

In the event of a prolonged and strong recession, the insurance industry will be affected. There will be a claims-related impact on lines of business like directors and officers and professional indemnity. On the revenue side, fields such as engineering could suffer from declining premiums as a consequence of reduced activities in the building sector, for example, he added.

According to Nurlan NADYRBAEV, Deputy General Director on Reinsurance, EASTERN Re, a 20-25 per cent rate growth as compared to the previous year is expected. At the same time, we believe reinsurers should apply a particular approach to clients, as a result of the financial crisis influence over the portfolio’s structure. Therefore, reinsurers must consider a company’s portfolio when setting up the reinsurance price rather than the overall insurance market of a country/ region.

The non-life reinsurance market didn’t take major catastrophe losses in the last 12 months, allowing us to negotiate slight reductions for the next period. I precisely refer to main business lines, the only exception being the aviation line, where there have been some important losses events this year,certainly leading to significant rates increase for these risks, Filip STAVROSITU, Reinsurance Manager, ASTRA Asigurari said.

A certain general evolution of reinsurance pricing is rather hard to estimate before the effectively start of the renewal season. Of course, where the global reinsurance market faced exceptionally losses, aviation lines for example, the buyers should expect price increases. Lacking these situations, a bigger flexibility of the reinsurance offer is expected. As price comes as a result of the demand-offer mechanism, the reinsurance demand slowing down in Romania could also lead to a certain decrease of the reinsurance rates, again the case of certain lines of business, Dragos CIOCAN, Reinsurance Manager at CERTASIG stated.

I believe we will witness a somewhat reinsurance rates rise, but not a very strong one, driven by the biggest players on the market – MUNICH Re, SWISS Re – who were hit by the financial crisis on the capital markets. This tendency will be highly “attacked” by an important number of cedants who earned less in this period, thus having less available resources. As far as OMNIASIG is concerned, we will try to maintain reinsurance price at this year’s level, considering we have faced some considerably claims increase, Georgeta CRIDEANU, Reinsurance Manager of the Romanian company explained.

What seems important to consider is that crisis will arise a certain disrupt of the underwriting balance, thus in the cashed premiums volume. Those companies that prefer to be as cautious as possible could find themselves buying more reinsurance than necessary, while those companies constraint to reduce reinsurance purchase having not so many available resources might buy less coverage than needed, Georgeta CRIDEANU added.

Boredom left Romania

So, the experts show their concern regarding the effects of economic recession upon certain lines of business, such as D&O or professional liability insurance. Also, the increases of the reinsurance premiums for primary insurers in Eastern Europe, including Romania must not be neglected, especially given the motor claims rising which will definitely pull up reinsurance rates on this line of business.

The largest reinsurance demand from Romania will certainly emerge from the new Insurance Pool against Natural Disasters - PAID, which is just about to be established and which shall become operative soon, according to MUNICH Re’s representative. In addition, it is expected that this will also trigger more insurance demand for mandatory products by e.g. owners of flats as a result of increasing insurance awareness.

From our point of view very challenging will be the future reinsurance of Motor Hull and, to a certain extent, Motor Third Party Liability business. The claims experience is very unsatisfactory and signs for improvement so far are not sufficiently noticeable. Hence reinsurance companies will need to analyze very carefully the extent of engagement they will be ready to offer next year, BRANDMAIER said.

ASTRA Asigurari’s Reinsurance Manager thinks that the ceding risks volume reduction is one sign that the Romanian market is growing up, as financial strength and the retention capacity for some risks is rising. PAID is the very hot spot that will throw a big influence over this year’s negotiations and catastrophe risk ceding, as the future pool is going to take a great part of the insurers’ exposure, Filip STAVROSITU stated.

It is also possible that decreasing the volume of ceded risks by the Romanian insurers comes as a response to the recent acquisitions in our market as big insurance groups have different or alternative conditions of placing risks on the reinsurance market for the new takeovers, including a growth of the own net retention capacity. But it is not the case of medium and small sized companies whose development is highly based on the offered reinsurance capacity, the Reinsurance Manager of CERTASIG said.

Scouting for the best

Following the financial crisis, some giant reinsurers running into trouble and AIG nearly going bankrupt, the buyers heading for the year-end reinsurance negotiations are going to be more cautious when choosing their business partners. Though, ratings seem to remain a useful way to look at a company’s financial strength and resilience.

It is true that more and more restrictions arrived with regard to choosing the reinsurer you are willing to trade with, partly about their rating. But these restrictions are not only a result of the financial crisis but rather a much more careful examination of the risk placement by the reinsurers, Dragos CIOCAN explained.

As far as choosing reinsurance partners is concerned, the most cautious ones have once again avoided companies with rating problems, while other insurers have taken advantage of the situation and “happily embraced” the lower rates of downgraded reinsurers. We could say we were extremely close from a chain breakdown of the insurance/reinsurance markets, but luckily the financial crisis driven problems have not been doubled by major material losses, OMNIASIG’s Reinsurance Manager believes.

Changing rules

The financial crisis and its impacts on the insurance industry still remain the biggest issue for 2009/2010, according to industry experts.

However, in the global economy there are the first signs that the negative trend is leveling off now. Many indicators for economic confidence have shown a better picture during the last few months, but the markets are still far from achieving the growth rates recorded before the financial crisis.

European insurance companies could be forced to pay more for reinsurance coverage in the 2009-2010 renewal season following the financial crisis affecting the world economy, says Jean Philippe THIERRY, Chairman of the Organizing Committee of Rendez-Vous de Septembre in Monte Carlo.

Reinsurers’ perspectives for profit and growth are clearly affected by the economic situation on the primary insurance side. There are higher costs of capital, capacity reductions and lower interest rates. But both commercial and private customers are generally unwilling to pay more premium for insurance products, the MUNICH Re’s BRANDMAIER said.

Also, slight changes of the reasons buyers are looking for reinsurance are also expected at this year-end renewals. So, the buying will be more about protecting capital rather than protecting earnings, given the capital difficulties the primary market could face in case of a big catastrophic event. Also, the implementation of Solvency II will grow emphasis on capital protection.

On the other hand, reinsurance has become an important and flexible alternative for refinancing. Then there is the growing demand for security and customized solutions from quality reinsurers. Last but not least, highly sophisticated enterprise risk management is necessary, meaning to find the right balance between control and enterprise.

Many analysts present at this year’s Monte Carlo Rendez-Vous appreciated that if the pressure of the prices charged by reinsurers will become too strong, then primary insurers may be tempted to find viable alternatives to traditional reinsurance: risk securitization, increasing the retention or setting-up pools. Meanwhile, everyone hopes that the end of the year will not bring a new wave of natural disasters, which would certainly bring in liquidity problems for some small and medium sized players.

I am sure that, by the beginning of 2010, insurers and reinsurers will find the necessary balance of this business, Jean Philippe THIERRY concludes.

In this context, major reinsurers reacted and announced in Monte Carlo the establishing of an association - GRF (Global Reinsurance Forum), meant to promote stability and free competition in the industry. In fact, the objective seems to be to create a common front with increased negotiation power in the relationship with the insurers and the supervisory and control authorities. MUNICH Re, SWISS Re, SCOR, GEN Re, HANNOVER Re, PARTNER Re are only some of the great names that were involved in this initiative, whose stake is developing a global business that exceeded EUR 130 billion in 2008.

REgaining balance

So, market experts believe that renewals that mark the end of the year will focus more than ever on matters such as financial security and capacity offered by the reinsurers, rather than on prices.

Nevertheless, insurers and reinsurers are now heading for a tougher round of negotiations, especially for the buyers who are trying to cut costs and who are having unrealistic expectations with regard to weak prices, as the market is clearly set to harden.