Upbeat in Monte Carlo

In contrast to recent years, the mood in Monte Carlo for this year's reinsurance Rendez-Vous was relatively upbeat. Reinsurance rates, credit ratings, the sustainability of profitable underwriting and the success of Bermuda dominated discussions in a market which has been buoyed by a lack of natural disasters, hard rates and the return of many insurers to profit.

But amid the sunny setting at this year's Rendez-Vous, some clouds loomed over the Monte Carlo horizon.

With reinsurers talking the market up and brokers talking it down in the ritual that is the renewal dance in Monte Carlo, it was difficult to predict exactly what rates would do as 1 January 2004 approaches. But after talk of the death of market cycles at last year's Rendez-Vous, this year the mood had changed. Reinsurers and brokers admitted that market cycles were here to stay.

However, the world's largest reinsurance broker, Aon Re suggested that perhaps the cycle had undergone some structural change.

Aon Re International chairman and chief executive Ross McKenzie said that,with rates in classes of simple reinsurance business expected to fall at next year's 1 January renewals, while rates in complex classes continue to increase, the polarisation could amount to a structural change going forward.

Aon Re said it expected rates in short tail business, such as property catastrophe, personal lines, some classes of aviation and marine risks to fall, while rates in long tail and complex risks, such as liability, directors' and officers', terrorism, cyber and biochemical would continue to harden.

The collective opinion of the ratings agencies was also that some lines of business, such as aviation and US property had already peaked, but others, such as marine and some long-tail lines were likely to record the biggest rate increases in the coming renewal season. They said that rate increases in other classes of business in 2004 were unlikely to match those achieved in 2003, and generally agreed that the current hard market cycle would last until early 2005.

Profitable underwriting
In light of speculation about a softening market, reinsurers were keen to talk up their commitment to profitable underwriting. However, doubts remained about whether the market would be able to continue underwriting for profit if one or two reinsurers began to cut rates.

McKenzie said that market supply and demand might undermine the best intentions of reinsurers.

"It looks like coming down to who blinks first," he said.

Ratings agency Moody's said that reinsurers would be at risk if they failed to maintain adequate pricing when the market began to soften. Moody's senior vice president Lynn Exton said if reinsurers failed to maintain profitable underwriting they would struggle to raise the capital needed to maintain current credit ratings.

"The industry's going to have to prove itself in many respects," Exton said. Fitch analysts agreed that reinsurers would probably return to unprofitable underwriting practices as rates softened.

Fitch warned that any rapid upturn in investment markets would see reinsurers begin to again write business at inadequate rates, accelerating market softening. In a warning to the market, S&P said the ability of reinsurers to maintain underwriting profitably would weigh heavily on the prospect of ratings upgrades in 2005.

Credit ratings
The majority of top 20 global reinsurers have had their ratings downgraded in the past two years and respondents to an Aon Re survey of its clients said that ratings were the most important factor when choosing a reinsurer. This brought into question the role, influence and methodology of credit rating agencies in reinsurance.

The recent downgrade of Munich Re from AA- to A+ by Standard & Poor's (S&P) was one of the most contentious subjects. The downgrade could make Munich Re an unacceptable risk to clients who would reinsure only with companies rated AA or higher. Munich Re has set itself a goal of return to an AA rating within one year, but Standard & Poor's poured scorn on its stated aim.

"I wouldn't rule anything out. But I don't see anything happening in the very near future," said director of financial services ratings at S&P, Stephen Searby.

In return, Munich Re levelled criticism at the methods used by ratings agencies to determine the financial stability of reinsurers. Reflecting on the current controversy around ratings methodology, Aon Re said that despite its survey results, it advised clients to take factors other than credit ratings into account when selecting a reinsurer. These included service delivery, long-term relationships and the company's willingness - and not just its ability - to pay claims.

Callum Stewart, managing director of broker Heath Lambert's reinsurance division, said he, too, advised clients to look at more than credit ratings. Stewart said that a reinsurers' willingness to pay claims should be the most important factor to clients, and that dealing with a reinsurer was still primarily about relationships.

Stewart said that it was important for buyers of reinsurance to remember that credit ratings were a relative measure as several reinsurers had their ratings cut in recent months. But despite the period of unprecedented downgrades, the ratings agencies believed the outlook for the global reinsurance sector was beginning to stabilise.

S&P was maintaining a negative outlook on the industry but Searby said: "The worst is probably behind us, but that's not to say we're calling a stable outlook yet."

Moody's was also maintaining a negative outlook, and said that the number of ratings downgrades was likely to outweigh the number of upgrades over the next six to twelve months. But Moody's expected downgrades would be less common in 2004 than in 2003.

Bermuda start-ups win respect
This year's Rendez-Vous marked a coming of age for those reinsurers who set up operations in Bermuda in 2002. No longer considered up-starts, Bermuda companies are beginning to gain credibility; at least in the eyes of brokers and ratings agencies.

Stephen Searby, of Standard & Poor's, said the Bermuda business models were based on opportunist entry to markets with hardening rates and exit when rates began to soften. This was coupled with their lack of legacy claims and short-term approach to relationships and gave them a competitive advantage over the long-established European reinsurers in today's market.

Searby went as far as to say that the old guard of European reinsurer should follow the lead of the Bermuda companies and become more opportunistic. Despite the newfound credibility, many market observers expected the reinsurers in Bermuda to begin a price war, but Aon Re UK deputy chairman Charles Cantlay said there was no evidence that those in Bermuda were cutting prices. "I don't see any of the Bermuda markets going out and cutting rates," he said. "They are underwriting very responsibly." But Cantlay also said he expected the Bermuda market to consolidate to three or four major players, as those start-ups with a smaller share of the market looked at exit strategies when rates began to soften. Callum Stewart, from Heath Lambert, described the Bermuda market as "healthy". Stewart said that Bermuda did not compete with the London Market as much as it was originally expected, but warned that softening rates could force the two into closer competition.