“The reinsurance market is trying to get the price of risks up across the world because they do not think that they can make the numbers work purely in the US increases – but the buyers are questioning why they have to pay more.” Charles Cantley, deputy chairman, Aon Re

The 50th anniversary of the event saw a change in procedure befitting such a golden year with Prince Albert of Monaco attending a lavish evening hosted by the organisers that saw delegates able to look across the moonlit Mediterranean.

I was an idyllic evening of calm for an event which saw a series of issues flaring up across the four days which pitched traditional reinsurers against the new capital models and reinsurer against cedant over pricing.

The issue of windstorm pricing was the biggest early topic but it was not over the Gulf of Mexico or the US.

Brokers have voiced their concerns over the stance from the reinsurers who were seeking to drive price increases for European windstorm cover a move that brokers said would be fiercely resisted by the clients.

Charles Cantley, deputy chairman of Aon Re said the reinsurers were holding firm.

“They are talking up European windstorm saying it is a global industry, but buyers are saying no,” he told a press conference.

The warning was that if the underwriters stuck to their guns the buyers would be looking to the arrival of new alternative capacity and vehicles for their risk or keep higher levels of retention.

He warned that it was evident that if cedants decided to retain more of the risk rarely would they ever seek to place it back into the market even if the brokers found a far more cost effective way of doing so.

“It is really what this conference will be all about this year,” he said. “The reinsurance market is trying to get the price of risks up across the world because they do not think that they can make the numbers work purely in the US increases but the buyers are questioning why they have to pay more.”

He added the biggest threat to the market at present was the rise in self-retention of risk and warned that those who say the cycle had ended were wrong.

It is an interesting turn of events for the market given that the primary carriers had spent much of the first part of the year telling their clients that the insurance mantra is that the premiums of the many pay for the claims of the few and that the fall out of the past two US hurricane seasons would see rate hardening across many of the classes and not just those with Gulf of Mexico exposures.

Brokers were saying that it had been a tough nine month as capacity squeezes in certain classes had made their role all the harder. However the arrival of new capital into the market from the hedge funds and the private equity companies were providing different challenges to the market.

Benfield chief executive Graham Chilton said that the arrival of the new reinsurance sidecars was a direct result of the desire from insurers to find more efficient ways of mitigating their risks.

He said reinsurance brokers were now working across the various risk mitigation models in order to meet the needs of their clients and there was every likelihood that would continue.

Interestingly, the rating agencies were singing from the same hymn sheet in terms of their outlook for the market.

All in the garden is stable in outlook but the warning signs were there for the reinsurers if they started to look to cut their pricing.

All warned that while stable meant the rating firms thought that downgrades would match upgrades in the year to come if the reinsurers stared to reduce premiums then they would start to cut the ratings.

All said there was now a greater concentration on risk management and they expressed fears over the new Bermudan start ups given that the market was not as good in terms of potential as it had been for the Bermudan class of 2001 and that a shortage of skilled senior management across the world saw a continued struggle to attract the people needed to drive business.

However the arrival in the principality of hedge fund managers and private equity firms had ruffled a few feathers.

The teams were keen to talk to the cedants and the reinsurers to explore opportunities on both sides and their presence was seen as a clear threat to the reinsurers by the brokers who pointed to the fact that a new option was in town for the primary market.

London and Bermuda were never far from the conversation and the delegates in Monaco raised an eyebrow to the news from London that Hiscox was set to be domiciled on the island as one of the Lloyd’s market’s most recognisable names headed offshore.

Bermuda remains home to much of the new capital and the talk from London was that the defection of Hiscox was a clear indication that the biggest threat to its status as the home of global insurance and risk was its tax regime which outweighed the access to the talent and expertise in the market.

But some said London faced a “chicken and egg” situation whereby its attempts to persuade the UK Treasury that there should be bigger tax breaks for the market would fall on stony ground while the Chancellor was able to point at the heavy costs of doing business in London due to its lack of process reform and move to electronic trading.

Aon Limited chief executive Dennis Mahoney was prophetic when he told a breakfast meeting on the day the Hiscox news became public that he found it astounded that he could communicate with Hiscox’s Bermudan operation electronically but was unable to do so with the insurer’s London operations.

He was speaking at a seminar on what price electronic process reform in London where he said the frictional costs of doing business were now a major issue, but that he was confident that the will for change in the market was there.

He cited the work by the G6 group of managing agents to drive process reform, one of which is Hiscox, adding there was no longer the need for the market to move at the pace of the slowest.

Standing on the brink:
Roger Townsend chief executive of Xchanging Insurance Services said the market stood on the brink of Reconstruction and Renewal for the London market’s back office and said he believed the pace of change was such there was little if anything which would stop the move, believing the question was now no longer if but when.

However he said there was no one firm which could drive the process and it needed a concerted market-wide effort to achieve the changes.

“I believe there is that demand for real change in the London market,” he said but agreed with many that said London needs not only process reform but also a reform of its tax regime to become attractive to the investors.

Meanwhile the investors were busy hosting the underwriters in an effort to play their part.

However there are those in the rating agency community, which question the long-term commitment of the funds to the market especially if the claims start to mount.

New emerged that freak dry African winds and Saharan sands had been a major contributor to the lack of hurricane activity so far this season.

Monte Carlo may not have had an issue that ripped through the Rendez Vous like a windstorm this year but there was plenty of evidence that the winds of change continue to blow across the market.

This Feature item appeared in issue 109 of JTW News - October 2006

Author: Jon Guy - JTW News