Baden-Baden burden: insurers contend with single-A and triple-B status

Risk & Insurance, Jan, 2004 by Graham Buck

Windstorms, floods, explosions and terrorism have dominated recent agendas at Baden-Baden, the genteel German spa town that hosts the annual gathering of reinsurance industry representatives.

That more bread-and-butter issues, such as ratings downgrades, were main topics of conversation this year reflects the fact that 2003 has--up to a point--been a less turbulent twelve months. Even the devastation wrought by the Californian brush fires produced losses of lesser magnitude than other recent catastrophes.

"There was more optimism evident this year," said Gerald Koenig, origination team chief at GE Frankona Re, Munich. "People feel that the market is turning around despite capital requirement issues."

Attention focused particularly on Munich Re's planned $4.4 billion fights issue after its ratings downgrade from double-A and the problems of French reinsurer Scor, which lost its single-A over the summer.

However, a raft of other companies has also suffered relegation to single-A status. Koenig noted that for most companies, the heavy burden placed on capital reserves means they have conceded that the price for regaining triple-A is too heavy.

"Primary insurers can no longer afford to pay for this level of security either, he also said. "The psychological burden now rests in between single-A and triple-B status."

It was also clear at Baden-Baden that representatives from the Bermuda and Lloyd's markets were making overtures to European reinsurance companies, "exploiting the vacuum created by Gerling and the weaker grades of other 'traditional' markets," said Alastair Speare-Cole, CEO of Aon ReGlobal UK.

Koenig agrees that Lloyd's is evidently looking more to business close to home across the English Channel, while Bermuda's more established players are now moving into new classes, including more casualty lines.

"I discern an interest but it is too early to say whether they will win a significant chunk of business," he said. "There was a mixed response from customers--many wish to use a variety of players, but there is still some uncertainty as to the backing behind some of the newer names."

Speare-Cole also said that a return to more normal conditions allowed many cedents to progress much further with their renewal process this year. The meeting Baden-Baden was therefore genuinely able to provide a forum for renewal discussions.

"However, with fewer Jan. 1 renewals--many cedents have moved to April 1 or July 1--this 'renewal forum' is of less importance than in former years," he said.

And what of pricing after the sharp rate hikes of the past two years? "Reinsurers maintained a brave face, but the general impression is of a marginal softening on property and a hard casualty market beginning to plateau."