Ludger Arnoldussen, member of the management board, preferred instead to focus on the need for a pan-European fiscal strategy largely to stave off the threat of inflation, the need for insurance support for the European Financial Stability Facility [the vehicle created to help facilitate the sovereign bailouts] and the rising complexity and need for a new approach to CBI.

CBI is of course a proper insurance topic of direct relevance to corporate insurance managers and his thoughts and the subsequent comments of others made on this topic during the meeting is covered on the front page of this issue.

But it was surely telling that Mr Arnoldussen did not use this platform in the eyes of the German and international business press to pronounce a call to arms to his underwriters to stop the rot and turn the market.

Mr Arnoldussen did make something of an effort to talk the market up after discussing the wider financial market issues in Europe.

He did stress that the trends all point towards ‘upwards pressure on pricing’, that a prolonged low-interest rate environment is ‘quite likely’, that reserve releases are ‘drying out’ and redundancies ‘largely exhausted’. He also added that the introduction of RMS11, the new model from the leading catastrophe modelling firm RMS that has basically upgraded cat risks, is having an ‘increasingly visible’ effect.

Mr Arnoldussen said that there will be ‘reduced capacity’ in the market as a result of the recent procession of big losses. But he added that there is still an ‘artificially inflated’ level of industry capital, which was perhaps the key point.

As with many other executives and market experts he also used the current buzz-word ‘fragmentation’ by which they mean that the days of market-wide movements of terms and conditions up, down or sideways en masse are perhaps over because of the rise of more sophisticated exposure and capital modelling tools, greater transparency and faster and more fungible capital flow.

As an example of this he pointed out that US casualty business and proportional business in general remain competitive and thus stable in price while loss affected segments, such as natural catastrophe and (perhaps more worryingly for CRE readers) large commercial business and specific motor markets, see price rises.

For renewals within Munich Re’s portfolio so far in 2011, Mr Arnoldussen reported a total increase of 4.3% as a result of a change in premium on a base of just over €11bn in premium income. Of this, price movement only accounted for 1%. The change in exposure for the group’s share in the risks accounted for the other 3.3%.

In very unaggressive language Mr Arnoldussen said that Munich Re is ‘actively managing the reinsurance cycle’ and sees ‘overall improving prospects with differing characteristics depending on business line and area’.

On the bigger macro picture he said that capital market fluctuations and the debt crisis are creating a ‘difficult’ operating environment for the industry and will have an effect on the ‘general preparedness’ to take risks.

Returning to the underwriting business he said: “The markets will stay fragmented and I believe that cycles will continue to flatten because of stronger transparency and risk management and a clearer picture of technical pricing [which will have an] impact on the fluctuation of the reinsurance cycle.” Mr Arnoldussen added that such uncertain times require an even stronger focus on underwriting profitability.

These are sensible words of course but again hardly a battle cry issued to a horde of bloodthirsty and vengeful underwriters desperate to cast off the shackles of a prolonged soft market.

In similarly pacifistic form, Swiss Re did not hold a press conference in Baden-Baden to state its position on the current market. It issued a statement before the event that also did not suggest that it would use the dodgy macro economic climate as an excuse to ramp up rates.

Martin Albers, Executive Board Member and Head of Client Markets Europe, suggested quite the opposite as he said: “Swiss Re continues to set great store by continuity in its client relations, enabling us to offer them stability and reliability. Our disciplined approach to underwriting is a key driver of profitability. We have enough capacity across all lines of business for our European clients and will offer it to them at prices commensurate with the risks involved.” These are not really the words of an underwriter under stress.

Swiss Re said that the challenging overall environment means that demand for capital has increased. “More stringent solvency requirements, historically low interest rates and a growing focus on the economic cost of risk are all contributing to boost demand for reinsurance cover. In the next decade, Swiss Re anticipates moderate, yet sustained growth in the reinsurance industry, with average annual growth rates of around 6.5% in the non-life segment,” it stated.

As with its arch rival over the Alps in Bavaria, Swiss Re did, however, point to pockets of hardening. It noted that in 2010, the combined ratio for the primary German motor insurance market is expected to be 105% as a result of ‘long years’ of rising claims payments along with cuts in original premiums.

Thomas Witting, Head of Client Markets Germany, Nordics and Baltics, explained: “The price war in the primary market has slowed, but the actual loss burden continues to grow faster than premium income. Given the historically low interest rates, investment income cannot balance out loss developments. There is a trend towards healthier rates in the primary market, but the market environment remains critical.”

Swiss Re said that the erosion in premiums and exposure to underwriting losses have been underestimated in recent years. “We cannot accept anything that would threaten the profitability of our reinsurance portfolio. Motor insurers need to respond far more strongly. Otherwise, the earnings situation in the motor insurance segment is bound to cause major problems. Swiss Re intends to remain active in this segment and to discuss closely with its clients how profitability can be achieved,” said Mr Witting.

And, as weary reinsurance executives headed home from Baden-Baden, Herbert Fromme, insurance correspondent of the Financial Times Deutschland (FTD), and occasional contributor to CRE, reported in the FTD that brokers had told him that Allianz plans to impose significant rate increases for motor business to end the long price war that it, reportedly, instigated.

Commenting two weeks earlier, Swiss Re stressed the rising incidence and cost of natural catastrophes in Europe and worldwide. But, it seemed, not because the reinsurer threatened to hike rates and pull cover as would normally be expected at this stage in the cycle, but rather to underline that it has ‘ample’ capacity to meet rising demand.

And it stated that the ‘more stringent’ requirements of Solvency II would ‘boost’ capital requirements, and pointed out that reinsurance is one of the most efficient ways of meeting the new demand created by the coming capital adequacy rules.

“Our financial strength, combined with our experience in implementing the Swiss Solvency Test, puts us in a position to support and advise our clients as they prepare for Solvency II, and to offer them high-quality, tailor-made solutions to their reinsurance needs,” said Mr Albers, once again underlining how, in public at least, the big reinsurers are focused on the opportunities not threats posed by the fast changing big picture.

So did Hannover Re, usually more direct than their rivals, offer a different perspective?

Not really. According to the team from Lower Saxony that focused its Baden-Baden presentation on the German market and its German operating company E+S Ruck, this will be a fairly uneventful year-end renewal for the German market at least.

It said that it is looking ‘with optimism’, not untrammelled glee, towards the treaty renewals on 1 January in Germany. “The claims situation and the prevailing uncertainties on financial markets—together with the associated challenge of generating sufficient investment income—should promote considerable discipline on the technical pricing side,” said Michael Pickel, member of the executive board. “We anticipate stable conditions overall, and allowing for the current financial climate this means that the profitability requirements in the portfolio can be maintained,” he added.

As with Swiss and Munich, Hannover said that the picture is, however, a mixed one. It stated that industrial property and casualty business in Germany remains the ‘scene of fierce competition’. “Price erosion in the original business is expected above all in property insurance. With this in mind, the company intends to write its business highly selectively. On the casualty side, by contrast, stable rates are to be anticipated,” stated the group.

Along with its rivals, Hannover Re also focused on demand for new business which was interesting in itself and positive for primary insurance buyers because it means the reinsurers are looking to build rather than retract.

It said that the accumulation of natural disasters and the arrival of Solvency II will probably be reflected ‘particularly prominently’ in rates for catastrophe covers. “It is our assumption that clients will reconsider the scope of their coverage and purchase additional capacities,” Mr Pickel said.

Hannover Re also said that prices should ‘trend upwards’ on the back of the current claims expenditures and those of previous years. “The latest model adjustments made by the provider RMS will probably also have an impact here,” it added.

To further underline the focus on the positive opportunities out there for reinsurers rather than the threat posed by thinning margins and need for tough rates increases, Hannover Re added that renewable energies offer ‘vast potential’ for reinsurers.

There were other insurance and reinsurance executives present at the Baden-Baden meeting more prepared to try and talk up the market in a more aggressive way.

During the opening debate organised by broker Guy Carpenter on the Sunday, Costas Miranthis, President and Chief Executive of PartnerRe, said that most of the conditions are in place for a turn such as high catastrophe claims, underwriting losses and a number of years of inadequate pricing. For a real turn the market needs capital shortfalls as in 2001 and the trend is heading in that direction, he said.

Clem Booth, member of the board of management for Global Lines and Anglo Markets at Allianz agreed that the market has not quite yet turned but is primed to do so soon. He pointed out that Allianz would normally expect about $250m of natural catastrophe claims in any given quarter and it is currently running at about double that rate.

Mr Booth also said that the effect of such losses can take time to process and therefore filter through to front line pricing later than expected.

But the ‘outside’ observers seem to agree that the forces are not quite aligned for the much vaunted market turn that the macro trends seem to demand at this year-end.

Chris Hitchings, Senior Vice President for research at Keefe Bruyette & Woods, was one of the speakers during the debate on Sunday and is not renowned for mincing his words. But even he was not prepared to forecast anything near a bloodbath at renewal.

Mr Hitchings said that a cyclical downturn of three to five years dominated by fierce price competition and excess capacity is what is generally needed for a market turn and that has not happened yet.

The equity analyst said that when such a ‘hideous and frightening’ cyclical trough emerges claims experience ‘goes off your radar’, companies have no idea what they will announce to investors in the next quarter and reserves go up ‘massively’.

At the same time significant ‘capital stress’ occurs and investors become very disenchanted. But, as he pointed out, this is simply not happening currently and the very fact that underwriters are trying to talk up the market means that a real market hardening is not really underway.

Mr Hitchings did point out, however, that the evidence suggests that the primary market is on the move regardless of what is happening in reinsurance. But he pointed out that for a big market move to occur both primary and reinsurance markets do tend to have to shift at the same time.

Frank Majors, Managing Principal at Nephilia Capital, pointed out that investors are still interested in a sector that can offer an uncorrelated asset class even at only single digit returns.

He said that when he asks investors whether there is ‘room’ in their portfolio for such an asset class the answer is invariably yes, whether the market is hardening, softening or flat.

He also said that the company likes to focus on areas where the traditional reinsurance industry does not ‘adequately’ finance risk such as in emerging markets and said that Nephilia is busy convincing investors to become involved in such ‘risk remote’ areas. Again demand seems to be there for this product, even if logic suggests that it is time to strap down your underwriters.

Stuart Shipperlee, partner at recently formed London-based Litmus Analysis, who recently joined from S&P, said that the market does not really make sense currently as reinsurers are valued below book value and so must either return capital to investors or put it to work in more profitable ways.

As with many others, Mr Shipperlee is not sure why investors so undervalue the market and suspects that they fear some unexpected bad news around the corner, such as a sudden rash of reserving additions as seen in 2001–2004 or at least a sudden end to results boosting releases, or, a worse than expected hit to the asset side of the balance sheet by exposure to sovereign debt.

The potential for a return to reserves additions rather than releases is certainly one to consider and would not surprise many who have been through a cycle or two.

Chris Klein, Managing Director and Head of Sales Operations (UK/EMEA) and Market Relationships at Guy Carpenter, does not predict a return to the massive reserve additions suffered by the industry between 2001 and 2004 but he did say that margins are certainly ‘thinning’ and evidence is mounting of a likely turn in the ‘reserving cycle’.

“We think margins are thinning. We recently published a report with Lighthouse Risk based on the US insurance industry benchmarks such as pricing and reserving using US P&C data because there is more data, it’s more granular and available than elsewhere. The analysis revealed a 7 to 8 year cycle and [it] appeared to show that we are approaching that part where companies may start adding to reserves. So in our view the margin is definitely thinning and this may have to be addressed over the next 18 months,” Mr Klein said.

But again the reinsurers were in no mood to ponder such dark thoughts in this surprisingly upbeat gathering.

When asked whether a prolonged soft liability market combined with low interest rates would ultimately require reserve strengthening Munich Re’s Mr Arnoldussen said: “No. We have been doing ALM (asset liability management) and if interest rates go down again we would be in the right level,” referring mainly to life business.

And when asked whether Munich Re believes it would be better to deploy its ‘excess’ capital by buying back more shares or give it to underwriters in the current market, Mr Arnoldussen said he would do the latter. “We stopped our share buyback programme during the course of the year and we are not going to restart it now. Also because of the losses, and we see an alternative use of capital at risk adequate prices, we will do it. Therefore share buybacks are not top of the agenda,” he said.

On the surface, such a statement would and should be regarded as good news by insurers and their customers because it does not suggest a sudden loss of reinsurance capacity that would spark an overall hardening of serious velocity.

But, one has to wonder whether there is a new element to the cycle at play here that has not been fully appreciated, digested and understood yet.

The reinsurers are, after all, supposed to be the ultimate managers of risk transfer capital, willing and able to bear the catastrophic risk in a capital efficient manner that the mass risk transfer market simply cannot absorb.

But that risk bearing comes at a price. And, if the reinsurers are feeling pretty positive about the outlook for the cost of risk transfer in this market then they either see something that the rest of us do not even appreciate or they think it’s worth keeping their powder dry and holding their capital for a much bigger fish that will pop out of the water in the future.

Moreover, if the reinsurers say that they are not unduly worried about the macro economic conditions and are actually looking forward to a meaningful spike in demand laid on a plate by Solvency II and perhaps more importantly the impact of the macro economic situation on the primary insurers, one has to wonder how badly placed are those primary insurers after all?

Is the inference of the talk at Monte Carlo and Baden-Baden not that the reinsurance industry has once again underestimated its exposure to the gathering storm clouds but rather that the insurance industry has done so in ‘biblical proportions’ to borrow a phrase from Chris Klein? Does this therefore really represent a great opportunity for the reinsurers?

If it does then this means that the primary insurers, particularly those with big life books, have seriously underestimated the impact of Solvency II and the impact of the Eurozone crisis.

And, in a mark to market world, we could see a sudden transformation of the ‘oh so clever’ insurance industry that dodged the credit crisis so well into the ‘oh not so clever’ insurance industry that actually did not dodge its ultimate impact and thus relied upon the reinsurance industry to bail it out at a very healthy premium indeed.

If this were to transpire then surely it would be not so clever a result for the primary insurance buyer because the primary insurers would become risk distributors rather than carriers over time just as the life insurers are destined to become. And that would seriously limit the ability of the corporate insurance buyer to build a programme that reflects their true risk profile rather than the simple cost of risk transfer.

Please sign up here to our full-time mailing list to ensure that you receive our weekly newsletter.

• More Behind The News
• More Insurance News