Indeed there are no reinsurers putting their heads above the parapet yet, to say they believe there will be any easing of rates in the next four months.

Every year as delegates head for the annual Monte Carlo Rendez- Vous there is talk of pivotal periods and a key renewal season in the offing. Jon Guy explains that this year, opinion is divided.

The market is clearly divided between the half full and half empty camps and for many industry observers, it makes life interesting. There are no definitive trends and so much potential for the market to change on the whim of Mother Nature.

With the North Atlantic hurricane season not having reached the furious heights of the past two years, there are those in the market which are breathing a collective sigh of relief, and others who may well be keen to test the resolve of the underwriters buoyed by the arrival of additional capacity predominantly into Bermuda.

For the first time in many years the market’s direction is not clearly signposted and the brokers and cedants which will fill the hotels, cafes and for some the yachts in the harbour, to meet the reinsurers, will do so with no clear and collective message from the underwriting community.

The half full lobby will deem those who are predicting tough times for the cedants as doom merchants, but they would best describe themselves as “realists”. There will be those who say there will be some tough talking from those who are still picking up the pieces from hurricanes Katrina and Rita and those who sense a capacity shortage in some areas and will be keen to make a maximum return.

Indeed there are no reinsurers putting their heads above the parapet yet, to say they believe there will be any easing of rates in the next four months.

One reinsurance broker says they are not expecting an easy ride.

“With or without any more hurricanes the market is standing firm,” he said. “There are a lot of people who believe we may well see some competition in the market, but the capacity in certain areas remains tight and while it means that the reinsurers are looking to underwrite in other areas, they want to do so at a level where the returns are attractive.”

Underwriters say that the 50th rendezvous may well be one where the line is drawn in the Monaco sand and whilst it is often seen as the early verbal sparring prior to the real business cum October, there will be little to smile about for those who believe that the reinsurance market is going to fall back into bad habits.

Throw into the mix that there are also a number of companies who have publicly stated in the early part of the year that they were retaining capacity as they believed that rates would continue to increase as the year progresses, and the cedants became ever more desperate for capacity.

However, there are those who say that the reinsurers may not have it all their own way and those who have played the waiting game may well have left it too late.

The year has seen a flurry of early renewals, particularly from those who have US natural catastrophe exposures, amid fears that those who were due to renew during the 2006 Hurricane Season could be left high and dry should another major storm hit.

The rates for nat cat business have increased across the board with the limited capacity for Gulf of Mexico and Southern US risks attracting rate increased in excess of 100 per cent.

Brokers have said that those who chose to renew early have been on the whole happy with the capacity and rates they have been able to secure and that the arrival of new capacity into the Bermudan market via the “Class of 2005” has softened the blow.

However the speed with which the new start up came to being was not fast enough for many to play a full role in the January 06 renewals, and they have been busy utilising their capacity in April and July.

It’s a big if, but should there be a benign hurricane season there is every expectation that the Bermudan capacity could be looking to make further inroads.

“The class of 2005 has been given some parameters in terms of what it can and cannot write,” said one broker. “The rating agencies made it clear that they would take a dim view of any underwriter who seeks to concentrate their capacity in a particular sector so they have been tempering their desire to reap the rewards in terms of underwriting high risk high return nat cat business.

“In January only Validus Re said they had used all their projected capacity in the January renewals while others were making a major effort for July.”

He adds: “They have all said that they were keen to win particular business and other than leveraging a very strong financial rating which takes time to build, the only real differential will be on terms and conditions and price.

“There is a belief that the new capacity will put a dampener on any significant rate rises this year.”

Underwriters have been keeping their strategies to themselves in the run up to the renewal season but off the record some have been talking of a market as benign as the storm season.

“There has been encouraging news in the early part of the north Atlantic season,” said one. “If the hurricane season does not provide a sting in the tale then the expectations are that the reinsurers will not be looking to push rate rises for January 07.

“Rates have risen across the board and the underwriters have to factor in the rising cost of potential exposures alongside the need to rebuild the reserves which have been impacted over the past two years.

“Quite apart from the losses of 2004 and 2005, the underwriting environment has changed. The industry now has to think the unthinkable and their models have now seen exposures double or treble.

“On the whole though, I think while there could be some small increases, we will see a flat season unless the weather decides to have another say.”

The issues remain fundamentally the same and the talk which will dominate the cafes and restaurants of Monaco over the four-day event may well be centered around trying to get an early steer on the underwriting stances of the major players, rather then the recent debates over how best to make the most of the prevailing conditions.

It might be Monte Carlo, it might be September, but this year the delegates at the rendezvous will have to earn their crust if they are to return with a clear idea of the way the market is heading – weather permitting of course!

This Special item appeared in issue 108 of JTW News - September 2006

Author: Jon Guy - JTW News