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In recent years business as usual hasn't always been possible at the annual reinsurance gathering in Germany's spa town of Baden-Baden. Its late October timing has placed it in the wake of catastrophes that have violently upset the assumptions of all risk models, such as Sept. 11, 2001, and Hurricane Katrina.

That no such drama affected this year's proceedings reflects the fact that the hurricane season proved more benign than anyone dared hope, coupled with the absence, outside Iraq, of major terrorist activity.

Reinsurers anticipate that 2006 will prove the most profitable in years. Improved conditions should also ease the upward pressure on rates and provide much-needed capacity for classes where supply lags demand.

A relatively quiet week of meetings and negotiations saw no single issue dominate the agenda, reported Geoff Bromley, chairman of Asia and Europe at reinsurance intermediary Guy Carpenter & Co.

"There was quite a bit of discussion regarding new sources of capital, possible changing influences of the capital markets, the changing CAT models and the role of the ratings agencies," he said. "But by and large, it was a matter of business as usual against a seemingly far more certain reinsurance market."

The more stable environment was reflected in the terms and conditions under negotiation, added Franz Hertl, senior executive manager for Germany at Munich Re. Rates outside of North America are fairly flat, with certain classes able to carry modest increases, and retention levels and other terms and conditions were generally little changed from last year.

In most other classes, Bromley said, many reinsurers at Baden-Baden regarded 2006 as "unusually good," both from a catastrophe and other large loss perspective. It also helps that casualty classes have continued to perform well globally.

"As to future loss expectancy, certainly the risk modelers are taking a much shorter-term view, and large-scale losses are viewed as much more likely to occur," Bromley said. "Capital models have had to take this into account, as do the ratings agencies. This is a major change in influence in the market."

Bromley added that all constituents, carriers and ceding companies alike are continuing to review CAT models.

They, as well as intermediaries and ratings agencies, are trying to grasp why the updated models are putting out different numbers than previous versions.

Katrina and other large losses have also led all parties to emphasize the need for the improved quality of data going into the models.

The new capital that has entered the market in the past year was discussed at Baden-Baden as well--the view being that it has helped bridge the gulf between supply and demand in certain key classes.

"It is arguable that it represents a more appropriate response to changing demand than would a more permanent capital solution," Bromley observed.

However, as this fresh capital supply is likely to prove only temporary, it is imperative to ensure the quality of the security. The ratings agencies are on this task, according to Bromley, investigating "tail risk"--that is, the sufficiency of collateralization--and the "reversionary risk" to the main carrier should the side agreements cease.

Also discussed at the meeting were Zurich's strengthened credentials as a reinsurance center. Over the summer, Swiss Re completed its acquisition of GE Insurance Solutions, to supplant Munich Re as the world's biggest reinsurer.

Days before this year's gathering got under way, Arch Re announced plans to open an office in Zurich. The moves sparked speculation over potential further mergers in coming months and whether other Bermudian reinsurers will raise their profile in Europe.

February 1, 2007

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